BER 310

BUSINESS LAW
THEME 1: GENERAL INTRODUCTION TO THE LAW

SU 1: History of the SA Law and an Overview of the Legal System in SA

Learning material
 Business Law paragraphs 1.01 – 1.18
 Class notes on the impact of the Constitution of South Africa on South African law

Learning objectives
After studying this section you should be able to demonstate your knowledge of the historical
development of the South African legal system:
1. Define the terms and concepts that are important for this study unit, including but not limited to
"Roman law", "Corpus Iuris Civilis", and "Roman-Dutch law". Your lecturer may highlight other
important concepts during lectures related to study units 1 and 2;
2. Discuss the development of the law from Roman law to South African law, with specific reference to:
2.1. The Roman law, specifically
2.1.1. The development of the law during the four periods of the Roman Empire;
2.1.2. The influence of the Germanic tribes on the development of the law;
2.1.3. The role of Justinian in legal development;
2.1.4. The Corpus Iuris Civilis: the Codex, Digesta, Institutes, and Novellae;
2.2. The Roman-Dutch law, specifically
2.2.1. The role of Roman law and its influence on Dutch law;
2.2.2. The development of Roman-Dutch law in response to the needs of society;
2.3. The South African law, specifically
2.3.1. The impact of historical events on South African law;
2.3.2. The impact of Roman-Dutch law on South African law;
2.3.3. The impact of English law on South African law;
2.3.4. The change from a parliamentary system to a constitutional dispensation;
2.3.5. The impact of the Constitution on South African law, especially the role of section 2 of
the Constitution.

Introduction
The historical foundation of the law is indispensable in understanding the principles of the current Law.
The history of South African law is threefold:
- Roman Law
- Roman Dutch Law
- South African Law

Roman Law
Roman law was first introduced in Rome by its inhabitants in the year 753 BC. There are four significant
periods of Roman Law:
The period of Kings (±753-510 BC)

• During this period the society was led by Kings and was primitive or simple.
• The economy was based on the ownership of land.
• The kings were regarded as religious, political and economic leaders.
• The Kings were assisted by the senate which was known as aristocracy (Upper class).
• Life was led by the Fathers in their families and had the power to decide on issues of death and
life.
- The father had the power to execute his child, if the child transgressed the law.
• The law was the rules of customs (established ways of doing things) that were accepted and handed
down from a long period of time.
• During this period, the law and religion were intertwined.
- The law was known as religious secret and was not accessible, and was perceived to be biased
towards the upper class.

Republican period (±510-27BCE)

• A struggle or conflict ensued between the upper class Roman citizens and the commoners where
were regarded as the lower class citizens of the Rome.
• The commoners complained that the law was a religious secret, inaccessible and unfair.
• Society was developing socially and commercially, thus the law needed to be developed to cater
for this society.
• The senate and popular assembly, an assembly of all Roman citizens among other legislations,
compiled the law known as the law of The Twelve Tables.
- This law was known as the law of Twelve Tables because it was drafted on the twelve bronze
plates situated at the market square for everyone to see, read and know what the law requires
of him or her.
- The law of Twelve Tables contained the substantive law and procedural law.
o Substantive law contains the rules that prescribe what is acceptable and what is not
acceptable.
- One of the substantive laws was that when one had intentionally burned the building of another
person, that person would be apprehended, flogged and thrown into the fire.
o Procedural law contains the rules of procedure to enforce substantive law.
- One of the procedural laws was that the law provided that when a debtor was not able to pay the
creditor, the creditor would take the debtor, tie him or her at the Market Square and call out to the
public for anyone who would pay out the debt of the debtor. If no one was willing then the creditor
would sell the debtor as a slave. Alternative the creditor would could cut and disembowel the debtor
and each creditor would come take a piece of meat.
The period of the Emperors (±27BC-284AD)
• During this period the Roman throne was ascended by Emperors.
• The Emperor became the Head of the Roman Empire.
• Roman law reached its peak. It had laws that aimed to achieve equality.

The Post-classical period (±284AD-565AD)

• During this period the Roman Empire was divided into two, the Western Empire and the Eastern
Empire.
• The quality of the law deteriorated systematically.
• The logic that characterised the Roman law disappeared.
• Invasion by the Germanic tribes
- In 476 AD, the Germanic tribes (originally from the Scandanavia) conquered the Western
Roman Empire.
- The Western Roman Empire deteriorated socially and economically.
- The Germanic tribes also influenced the Roman Law with their primitive law.
- The Roman law was vulgarised.
- The logic, reasonableness, clarity and system of the law disappeared due to the influence of the
Germanic tribes and their primitive law.
• Efforts of Emperor Justinian (Eastern Roma Empire)
- However, in the Eastern Empire, Emperor Justinian (527-565AD) made a great effort in
preserving the great Roman law. He was responsible for drafting (codifying) the entire Roman
law.
- The codification of the Entire Roman law was known as Corpus Iuris Civilis and consisted
of the following:
❖ Codex – legislation (written statutes which are similar to our current Acts)
❖ The Digesta – important works of Roman jurists (Opinions of jurists).
❖ The Institutes – basic textbooks of students (which served as commentaries of the law)
❖ Novellae – Additional and new Legislation compiled after completion of Codex.
- Sadly after the death of Justinian, the Roman legal system deteriorated and disappeared due to
the invasions of other cultures who introduced their primitive legal systems.

Roman-Dutch law
Since Roman law was known for its logic, clarity and reasonableness, it was still applied in the
mediaeval (5th- 15th century AD) Europe. In other words, it influenced some areas of the legal systems
of European territories. Canon law or clerical law (church law) which was founded on Roman law
played a significant role in the legal systems of the European territories. In the 1100 AD, interest in
classical Roman legal system was revived by Glossators (scholars who wrote glosses or notes between
the texts of Corpus Iuris Civilis. These legal scholars undertook a deeper study of the Roman law.

Reception of Roman law into the Roman Dutch law

• The law of Netherlands (Dutch) was mainly the Germanic customary law that was known for being
primitive.
• The Netherlands society was rapidly developing in terms of trade and commerce.
• This law failed to solve complex social and economic problems that faced the people of
Netherlands.
• There was a need for a more efficient and sophisticated legal system to solve the complex life,
trade and commercial problems.
• In 1500AD, the Roman law that was known for its logic, reasonableness and clarity was applied
in conjunction with the Dutch law in the Netherlands.
• The application of the Roman law in conjunction with the Dutch law was known as ‘the reception
of Roman law to the Dutch legal system’.
• Consequently, this led to the formation of what is known as Roman Dutch law.

The South African law

In 1652, Jan Van Riebeck came to the shores of South Africa. He came with the Roman Dutch Law.
This law is known as our common law. It contained the writings of the old jurists who compiled the law
that was applied in the Netherlands.

British occupation
However, South African law is also strongly influenced by English law due to the British occupation
of South Africa in the early 1800. This is because when the English occupied South Africa in the early
1800:

• The English judges and magistrates presided over the cases in South African courts.
• South African jurists studied in England.
• The South African courts applied English cases.
• South African legislation was based in English law.

As a result, English law also formed part of our common law. The Mercantile law of South Africa is
mainly based on the English law. E.g. Company law, Bills of Exchange and Insolvency law. On the
other hand, the law of partnerships and specific contracts is based on Roman Dutch law. Since society
evolves or changes, the Roman Dutch law and English law have been developed by Legislation drafted
by legislators, Courts when delivering cases(doctrine or precedent), and African customary law.
Consequently, we have the South African legal system as it is known to us today.
The South African legal system is not codified. This means it is not entirely (toto) found in legislation.
However, some fields have been codified such as law of Insolvency.

The change from the Parliamentary system to the Constitutional dispensation

During the dark past of South Africa, a past that is known for gross violations of Human rights by the
apartheid government to the people of South Africa, mainly black South Africans, we had what was
known as Parliamentary sovereignty or Parliamentary system. During this system, Parliament was
responsible for the creation of laws and no one could challenge the laws that were created by a properly
constituted Parliament. Parliament was the beginning and the end of the law of the country no matter
how unreasonable and unfair the laws were.

However, during the dawn of democracy, a system known as Constitutional dispensation or

supremacy was introduced. This system meant that although parliament has the prerogative of drafting
laws, any law that is inconsistent with the Constitution of South Africa, 1996 is invalid. The courts have
the power to declare any law unconstitutional provided there are valid grounds to do so. E.g., the law
unfairly discriminates people based on their gender.

The impact of the Constitution on South African law, especially the role of chapter 2 of the
Constitution
The South African legal system (Legislation, Common law and Customary law) as the body of rules
that prescribe what is acceptable and unacceptable in the regulation of human interaction with one
another, with the state and with property or things is intercepted (guided, influenced or indwelt) by the
Constitution of South Africa, especially chapter 2 of the Constitution which contains the Bill of
Fundamental Rights.

The Legislation, Common law and Customary law must be in line or give effect to the Fundamental
rights. Any law that is contrary to the fundamental rights is invalid. The interpretation of law in any
dispute should always give effect to the Fundamental Rights.
SU 2: Legal system and Creation of Rules of Law

Learning material
Business Law paragraphs 1.19 – 1.44

Learning objectives
After studying this section you should be able to demonstate your knowledge and understanding of
the South African legal system in the following manners:
1. Define, explain, and distinguish between, the concepts of "law" and "rights";
2. Define, explain, and distinguish between, law in the "objective" and "subjective" senses;
3. List, explain, distinguish between, and identify examples of, the categories of subjective rights;
4. List, explain, and discuss the requirements of, the sources of South African law;
5. Understand the South African court system, with specific reference to:
5.1. The meaning of "jurisdiction";
5.2. The roles and jurisdictions of the various courts;
5.3. The similarities and differences between the various courts;
5.4. The meaning of, and differences between, "civil" and "criminal" matters;
5.5. The meaning of, and differences between, "application" and "action" proceedings;
5.6. The meaning, role, benefits and shortcomings of the "doctrine of precedent" in South Africa;
5.7. The meaning, process (briefly) and function of "an appeal";
5.8. The meaning and role of, and difference between, "ratio decidendi" and "obiter dictum";
6. Apply the abovementioned principles/law to relevant but unfamiliar scenarios to solve practical
problems.

What is law?
Law is the body of rules which members of the community must adhere to and the aim is to ensure that
members of community live orderly.
→ In other words, law is the body of binding rules that regulate human interaction with one another,
with things and with the government for the sake of orderly living.
→ Without law we would be extinct (cease to exist). We would kill each other and ourselves.
→ The key word here is “binding”. The members of community must adhere to the law. We have the
responsibility to adhere to the law.
→ The state or government has the power or the authority to enforce the law.
→ This means that those who fail to obey the law may be instructed to adhere to the law, apprehended
(arrested) and punished. This makes the law different to other systems of rules that regulate human
behaviour but are not enforceable by the state. E.g., religious rules.
The rules of law can be Peremptory or merely Regulatory in nature.
Peremptory (coercive) rules are rules that members of the community must adhere to. There is no liberty
or freedom to choose not to adhere to the law. E.g., in the National Road Traffic Act, section 59(4) provides
that no person shall drive a vehicle on a public road in excess of the general speed limit.

Regulatory rules are rules that allow parties to regulate their own relationships. Parties may choose not to
comply with these laws. They will be bound if they choose to comply. E.g. in the South African Electoral
Act 73 of 1998, section 6(1) provides that any South African citizen with a South African ID may apply for
registration as a voter. It is not a must for South African citizens to register to vote as they can choose to do
or not. If they do then they must comply with the law.

Law in the subjective and objective sense

Law in the subjective sense
Law in the subjective sense refers to the law as it regulates relationships between legal subjects as
the bearers of rights and duties in relation to one another and bearers of rights in relation to the legal
objects (things). The relationship is twofold.

• Subject to subject
(Rights of legal subjects on objects)
• and subject to object.

Subject to subject relationship

▪ E.g. as an owner of a car, I have the right of ownership to the car and other subjects have the obligation
or the duty to respect my right of ownership.
▪ You have the right use your car in terms of the Hire Purchase contract, all subjects have the duty or the
obligation to respect your right to use the car. No one can arbitrarily take away the use of the car.

Subject to object relationship

▪ As an owner of the car you have the right to use the car and no one can take limit your right to ownership
arbitrarily.

Law in the objective sense

▪ Law in the objective sense: refers to the rules and principles of law as they regulate the exercise
of government’s power (Public) and as they regulate the relationships between legal subjects
(Private).
- E.g. when a crime is committed, the state in the public interest particularly the protection of subjects,
will institute an investigation, charge the alleged perpetrator, (if there is a prima facie case prosecute), if
there is (sufficient evidence), the state will convict and sentence to imprisonment or impose a fine.
(Public/State)
What are Rights?
• A right is the legal interest of the subject in an object or a thing (e.g. house or a car) which is
protected against other subjects.
• A legal subject is a natural person or an entity that can be a bearer of rights and duties in terms
of the law.
• There are two types of legal subjects: natural persons and juristic persons or legal persons.
- Natural persons are regarded as legal persons from birth to death and juristic persons such as
companies are regarded as legal subject from incorporation (registration) to dissolution.
• Thus, law is not rights, but law among other things contains rights and duties of legal subjects,
including the Government.
- E.g., Duties of employers in the Labour Relations Act.
• Rights are legal interests that legal subjects have on legal objects.
- E.g., Real right (ownership of the car), Personality right (right to dignity), and Personal right (right to
use and occupation (lease).
• As provided above, there four different types of rights:
- Real right → this is a right to corporeal things or things we can touch. E.g., ownership or a house or car,
this right is applicable and effective against the whole world.
- Personal right → this right entitles the holder some form of performance or delivery of a thing. They
arise as a result of a contract (lease contract or hire purchase contract (lessor must make the premises
available and lease must pay rent). In a Delict or wrongful acts. You negligently collide with my car; this
entitles me damages caused in my car.
- Intellectual rights → these are rights that a person has in the creations of his mind. E.g., Copy right,
trademarks and Patents.
- Personality right → refers to the rights that have to do with some aspects of your person as human
being. E.g., Right to dignity and right to life.

Creation of Rules of Law

• The basic source of law is common law which is the Roman Dutch law and English law. However,
new rules cannot be created through common law. The rules can be created through:
- Custom
- Legislation
- Cases

Custom as a source of law (How can Custom create law)

▪ Custom is an entrenched or a well-established way of doing things that can create a binding
unwritten rule/law.
▪ The important thing is that it must be well-established or deep rooted in a particular community
before it becomes custom.
▪ There are prerequisites that a custom must meet before it becomes a binding unwritten rule:
- It must be reasonable (sensible)
- It must have existed for a reasonably long period of time.
- It must be accepted and complied with the by the community that created the custom. (No
dissent by other members of the community)
- The contents of the custom must be clear and certain (not ambiguous).

In the case of Van Breda vs Jacobs 1921 AD 330, the court held or decided that where a
fisherman finds or locates fish and throws his net around the school of fish, no other
fisherman can fish within a reasonable distance from the nets of the first fisherman. This was
applicable in instances where the boats were not moored (fixed) permanently. This custom
complied with all the requirements above.

Here a rule was created.

In the case of Green v Fitzgerald 1914 AD 88, the court held that adultery was no longer
crime. The way of life at the time became so established that adultery ceased to be legal rule
enforceable by the state.

Here a rule was abolished.

Legislation as a source of law

Legislation refers to rules of law that are drafted by Parliament, Provincial legislation and local
government. These levels of government have legislative powers to draft law.
- Parliament draft Acts or statutory law
- Provincial legislature drafts provincial law
- Local government drafts municipal by-laws.

Parliament (section 44 of the Constitution)

o Parliament is the highest body that has the authority to draft or make (enact) laws.
→ The laws enacted by parliament are known as Acts of parliament.
→ E.g. Companies Act 71 of 2008.
→ These are known as primary legislation.
o Parliament consists of two houses, National Assembly and National council of provinces.
o The required votes for the passing of draft of laws as Acts of parliament are a normal majority.
That is 51% votes or more.
o You will recall that in the past Parliament had the power to pass any law no matter how unfair and
unreasonable the law may be. No one including courts had the power to challenge such laws. This
was known as Parliamentary system or sovereignty.
o However, currently under this constitutional supremacy or dispensation, parliament cannot
make or enact laws that are contrary to the Constitution, particularly the Bill of Fundamental rights
found in chapter 2 of the Constitution.
o The Constitutional Court has the power to declare any Act that is contrary to the Bill Rights, any
administrative action by the state, action by a private institution or any contract unconstitutional.
- E.g., where the government or a hospital unfairly discriminates another on the bases of gender or an
employment contract between an employer and an employee amounts to an unfair discrimination on the
bases of gender.
o However, the Constitution may allow a limitation of a fundamental right provided the limitation is
justifiable in an open and democratic society. In other words, when it is reasonably necessary and
in the public interest for the fundamental right to be limited or infringed.
- E.g., Right to freedom of speech, privacy, dignity, property may be limited if it is reasonably necessary
and in the public interest.
- Let’s think about some examples here:
• You require a Government Department to give you access to information which may jeopardise the safety and
security of the State and its people. Your right to information may be limited in the interest of safety and
security. This means that the limitation is justifiable in an open and democratic society. It is reasonably
necessary to limit your right.
• E.g., Jacky (an Engineer) needs the Government Department to give him access to some information
concerning the Defence force of the Country. The information may jeopardise the safety and security of the
country. The Department refuses citing the concern on the safety and security of the State. Do you think the
action of the Department amounts to an infringement of Jacky’s right, can the Department justify its action and
if so, why?
• Answer: The Department would be able to justify it’s decision, as the limitation of Jacky’s right to information
is done in order to ensure the safety of the State and is therefore done to protect public interest. The Constitution
allows for such limitations, as it is reasonably necessary and in the public interest.

Provincial legislation (s104 Constitution)

o Provincial legislature has power to make provincial law, e.g., in areas such as Health and Tourism.
o The powers are granted in the Constitution of the Republic of South Africa, 1996.
o The Provincial legislature must always act within the scope provided by the Constitution.
o Any legislation that is drafted or made outside the scope of the powers of Provincial legislature is
ultra vires and invalid.
 Ultra vires is a Latin phrase used in law to describe an act which requires legal authority
but is done without it. Its opposite, an act done under proper authority, is intra vires. Acts
that are intra vires may equivalently be termed "valid", and those that are ultra vires termed
"invalid".
o The High Court has the power to declare any Act or action of the provincial legislature invalid if
it is contrary to the principles of the Constitution and the Bill of Fundamental Human rights.
o Parliament may draft or make laws in the area delegated to the provincial legislators. In these
circumstances the provincial laws will take precedence unless the Parliament legislation is needed
for economic unity/safety etc.

Municipal/local councils may also make by laws. The above rules apply to the municipal by
laws. (s156)
Subordinate legislative bodies
▪ Legislative authority may be conferred on the Minister of Trade and Industry in terms of the
Consumer Protection Act 68 of 2008 to pass regulations that carry the same weight as legislation
regarding South African consumer agreements.
▪ This is done to enable the minister to make regulations that serve to close the gaps or areas that are
not addressed by the Act of parliament.
▪ The regulations of the Companies Act have the same weight as the Act and serve to supplement
the Act in areas that are not addressed by the Act. Regulation 9 the supplementary rules that are
applicable when reserving company names. E.g., Forms of application.
▪ The subordinate rules must comply with these requirements before they are accepted as law:
- Must be within the scope of the delegated legislative authority, otherwise they are ultra vires.
The Minister must not overstep or exceed the delegated powers when exercising the delegated
legislative authority.
- Be reasonable (sensible).
- Must be impartial and unbiased
- Clear and certain
- Must be published (promulgated)

Courts decisions as Sources of law

➢ The primary function of the courts is resolve disputes in a just manner and this is known as the
administration of justice. This function is necessary in ensuring orderly living of subjects in relation to
one another, with the state and things. The courts do this by interpreting the law and applying it to the
facts that bring about a dispute.
➢ The courts’ primary function is not to create law, however, in some instances legislation, common law
and customary law may not provide any regulation that governs the area of dispute (lacuna). Then
courts will have to create law. This is known as the doctrine or the principle of stare decicis or
precedent.
➢ There are different courts in the Republic of South Africa and they are divided into Higher Courts and
Lower courts.
Applications and actions
 There are two types of cases/disputes.
- There are cases where there is a material dispute of facts. E.g. in a case of collision of cars. Where
A alleges that the robot was green and thereby granted him or her right of way and where B alleges
that it was red for A and thereby granted him or her the right of way.
- And there are cases where the parties agree with all the material facts of the case.
 In case where there is a material dispute of facts, one has to use action proceedings.
- The plaintiff will issue summons and the defendant will file a plea (which seeks to defend
allegations made in the summons).
- The case will end up in court where witnesses will be called to prove the versions of the plaintiff
and defended.
- Ultimately, the judicial officer will weigh the evidence in support of each version and grant
judgment in favour of the person who presented a version of events and evidence that are probable.
(Balance of probabilities)
 Where there is no material dispute of facts, application proceedings may be used.
- Here the party instituting an application is called applicant and the other party called a respondent.
- The party launching an application (Applicant) will do so with a founding affidavit which contains
the bases that support his application. The opposing party will write an opposing affidavit providing
the bases of opposition.
- The court will weigh the evidence from the affidavits and decide in favour of the party that presented
a version and evidence that are probable. (This is referred to as the balance of probabilities)
 However, there are cases that should only be dealt with in terms of application or action as prescribed by
the law. E.g. Sequestration by application or Divorce by action.

Higher courts
▪ The Constitutional Court is the Highest Court in the land.
▪ Supreme Court of Appeal, is a court of appeal not a court of first instance.
▪ High Courts which have divisions in all the provinces of the country.

Constitutional court
▪ This is highest court of the land.
▪ Jurisdiction (the authority to hear and decide matters or disputes) of the Constitutional court:
- It decides matters that are constitutional in nature. E.g. right to life/right to education.
- It can also grant leave to appeal to it in matters that have a point of law that is of general public
importance. E.g. right to education.
- It makes a final decision whether a matter is within its jurisdiction (the authority to hear the
matter)
Supreme Court of Appeal
• This court has the jurisdiction (the power and the authority to hear and decide a dispute or matter)
to hear any appeal from High courts in the country.
• This is purely a Court of Appeal not a court of first instance.
• This means that a matter or dispute must first be heard by another Court usually a High court before
it comes to Appeal.
• When the latter High court has erred on the interpretation of law or facts, then matter may be
brought on Appeal provided leave to Appeal is granted by the court of first instance or Supreme
Court of Appeal.
• This court may only decide matters that are:
- Appeals
- Related to appeals
- Any matter provided in the legislation
• It is the final court in Appeal matters, unless the Constitutional court is the final Appeal court in
the matter.

High courts
• The High courts that are found in all provinces have the power to hear cases and disputes.
• They can hear criminal cases or civil cases.
• Criminal cases are cases that arise as result of actions that transgress the norms of society and the
transgressions are punishable by the state to ensure orderly living. Here the police will investigate
the matter and the accused will be charged by NPA on behalf of the state. E.g. Fraud, Rape, and
Drug Trafficking or Dealing in Drugs. Here the state must prove beyond a reasonable doubt before
the accused can be found guilty.
• Civil cases are cases that arise as result of one person causing harm or damage to another, their
property or personality. E.g. You negligently collide with my car and cause damage of R200 000.
Here the plaintiff must prove on the balance of probabilities that the defendant negligently caused
the collision. Civil cases may be instituted in terms of an application or action
• In civil cases the court may grant the:
- Claim or application order,
- Interdict,
- Declaratory order
• The High courts have the jurisdiction or the authority to hear and decide on matters of persons:
- Residing in its area of jurisdiction.
- All actions that can be heard within its area of jurisdiction.
• In criminal matters High courts can hear any matter or crime.
Lower Courts (Regional courts and District magistrate courts in each district area)
▪ Other courts created by legislation of parliament (Labour court or Competition Appeal Court)
▪ The Constitutional court, Supreme Court of Appeal and High Courts are colloquially referred to as
higher courts and Lower courts are known as Magistrate Courts.
▪ Lower courts are divided into Districts Magistrate courts and Regional Magistrate courts.
▪ Each District Magistrate courts serve a particular district and Regional court serves a region.

Regional courts
▪ Regional courts have a broader scope in terms of hearing matters. In civil matters, Regional courts
have the jurisdiction to hear matters that are limited to R400 000 and can also hear divorce and
sequestration matters.
▪ However, parties may agree to higher amounts.
▪ In criminal matters they can hear any matter except High treason.
▪ And its jurisdiction is limited to a fine of R600 000 or maximum of 15 years imprisonment.

District Magistrate courts

▪ In civil matters the jurisdiction of district courts is limited to R200 000.
▪ However, parties may agree to higher amounts.
▪ In criminal matters jurisdiction is limited as follows.
▪ The court can hear any crime except:
- High treason,
- murder and
- rape and
▪ Can only impose a fine of not more than R 120 000 and maximum term of imprisonment of 3 years.

Specialised courts
▪ There are also specialist courts such as labour court, competition court and equality courts, tax
appeal court and competition appeal court etc.
▪ These are specific problem solving courts.
▪ Some of them such as Labour Court, Competition Appeal court and Divorce court have the status
of the High Court.
▪ And there is a small claims court with a limit of R20 000 and no legal representation is allowed.

Appeals
➢ Decisions of lower courts may be heard by the High courts in the region.
➢ Decisions of single judges in High courts may be appealed and heard by 3 judges of the same court.
The court constituted by the three judges is known as the full bench.
➢ Appeals from High Courts may be heard by the Supreme Court of Appeal.
➢ And the Constitutional court is final court in constitutional matters.
➢ However, you need to apply for leave of appeal first before you can appeal.
➢ When one of the parties in a criminal case or a civil case is of the view that the court made an error
in the interpretation of law or facts, the party may apply for the leave to appeal.

Where one of the parties in a case is of the view that the court committed an irregularity in its process
(unfairness/biased/admission of inadmissible evidence), the party may apply for review of the
processes.

The appeal process will be lodged to the court of first instance through an application process within
a specific time frame, where the applicant, the party lodging an appeal makes an application
supported by an affidavit.

The affidavit will contain the merits of the case or the facts that serve as the bases of the application
for leave to appeal.

The court of first instances will most probably refuse and then leave to appeal will be lodged with
the Supreme Court of Appeal. The appellant will write an affidavit which contains the bases of his
or her application for leave or permission to appeal. The respondent may oppose leave to appeal with
affidavit which contains bases for opposition.

The appellant will furnish the reply and then the judge will weigh the bases and decide to grant leave
to appeal or dismiss.

This process presents an additional opportunity to be heard again, in the event that one of the parties
is of the view that the court came to an incorrect decision.

This may in some instances prevent injustices.

However, some may abuse the process by using it as a delaying tactic.

Stare decisis or the Doctrine of precedent (standing by the previous decisions)

❖ This principle means decisions of the Higher courts bind the decisions of the lower courts
and the courts are bound by their own decisions and decisions of same court.
❖ The principle of stare decisis is a juridical command to the courts to respect decisions already made
in a given area of the law. The practical application of the principle of stare decisis is that courts
are bound by their previous judicial decisions, as well as decisions of the courts superior to them.
❖ However, the binding part is the ratio decidendi – the reasons of judgment – not passing remarks
made by the courts (which are the obiter dictum).
❖ E.g., if a particular High court decides that denying citizens access to water by the state is an
infringement of a fundamental right and declare the decision of the municipality to deny citizens
water invalid and unconstitutional. The High court is bound by its reasons of the decision in the
future cases and also the reasons of the decisions of the Higher courts.
❖ The decision of the Constitutional court bind future decisions of the Constitutional court, the
Supreme court, the High courts and lower courts.
❖ The decisions of the Supreme Court of Appeal bind its future decisions, the decisions of the High
Courts of the country and lower courts.
❖ The decisions of the full bench of a particular division bind the decisions of the single and two
judges’ court in the same court and the subordinate lower courts in the area of jurisdiction.
❖ And the decisions of the single judge in the same court bind the future decisions in the same court
and lower courts in the area of jurisdiction.
❖ The lower courts are not bound by their own decisions.
❖ The merits and demerits of the stare decisis
- Merit: This principle ensures that there is consistency in the decisions of the court.
- Demerit: However, cases where judges or judicial officers made errors in their reasons of
judgment may influence future judges to commit the same errors.
❖ Exceptions to the principle
- When the facts are materially different.
- When the reasons are incorrect, where the court erred in making the decision.
❖ The key here is that reasons of decisions are binding – not passing remarks by judicial officers.
❖ Some important decisions are published in law reports to provide access to decisions.

Reporting of cases
THEME 1: SELF ASSESSMENT

ClickUP: Week 1 Self Assessment

Question 1:
Amy wants to apply for an interdict in the form of a restraining order at the Pretoria High Court in order
to protect herself from Rubie’s imminent threats. Rubie wants to oppose this application on the basis
that he has not threatened Amy in any way. In this matter, how will the parties be referred to in court?

a) Applicant and Respondent

b) State and Accused
c) Plaintiff and Defendant
d) Amy and Rubie
e) Appellant and Respondent

Question 2:
Three judges of the North Gauteng High Court in Pretoria delivered an important judgment in a criminal
case on 10 December 2017. The following courts are bound to this judgment:

a) All the courts in South Africa, excluding the Constitutional Court and the Supreme Court of Appeal.
b) All the courts in South Africa, excluding the Constitutional Court, the Supreme Court of Appeal and the
regional magistrates’ courts.
c) A single judge of the North Gauteng High Court in Pretoria, the Pretoria regional magistrates’ court and
the Pretoria district magistrates’ court.
d) All the High Courts in South Africa.
e) A single judge presiding in any seat of the High Court.

Question 3:
Lucas is a famous inventor of new environmentally friendly trucks. He stands in his ultramodern
workshop and admires the revolutionary new electrically powered truck that he designed for the
company, Big Riggs, which still owes him R500 000. The R500 000 owed to Lucas is an example of ...

a) A real right because Big Riggs owes Lucas for the ownership they have obtained in the environmentally
friendly truck.
b) A real right because Lucas can claim the R500 000.
c) A personal right because Lucas is entitled to institute an action against Big Riggs.
d) A personality right because Big Riggs must still pay Lucas in person.
e) An intellectual property right because Big Riggs used Lucas’s creation to make money and did not pay
him.
Question 4:
Which of the following is not a requirement for the validity of subordinate legislation:

a) It must be impartial and not discriminatory.

b) It must be reasonable.
c) It must be certain (clear) and not vague.
d) It must be withheld (kept secret).

Question 5:
Which of the following court’s decisions will a full bench of judges in the North Gauteng High Court
in Pretoria be bound to follow?

a) A decision by a full bench of the High Court in Pietermaritzburg.

b) All previous decisions of the North Gauteng High Court in Pretoria.
c) None of the options provided.
d) A decision by a bench of two judges of the division of the High Court in Cape Town.
e) A decision by a bench of three judges of the Supreme Court of Appeal.

Question 6:
Complete the following sentence: A peremptory legal rule ...

a) is temporarily in force and can be relinquished.

b) define relationships between parties.
c) is forever in force and cannot be remitted or changed without following the necessary processes for
amending legislation.
d) is usually agreed between persons.
e) is temporarily in force and will change after its time in force has lapsed.

Question 7:
The South African common law is based on:

a) Customary law
b) Roman-Dutch law
c) German law
d) English law

Question 8:
Justinian is famous for _____

a) Codifying the Roman law into the Corpus Iuris Civilis.

b) Translating the Corpus Iuris Civilis into Dutch.
c) Destroying the Corpus Iuris Civilis.
d) Commenting on the Roman-Dutch law.
Question 9:
Complete the following sentence: The Constitution forms the basis of current South African law and
the Court may impose restrictions on rights when ___________

a) there are non-conflicting interests at stake, but one is given priority, while the other is limited.
b) conflicting interests are at stake and both rights are limited.
c) conflicting interests are at stake and one is given priority, but the other right is not limited.
d) non-conflicting interests are at stake and both rights are limited.
e) conflicting interests are at stake and one is given priority, while the other is limited.

Question 10:
A custom may either abolish or create a legal rule provided certain requirements are met and therefore,
a custom can also be a source of South African law. This statement is:

a) True because custom is another term for legislation.

b) False because a custom can never create a legally binding rule.
c) False because a custom can never abolish a legal rule.
d) True.

Question 11:
Choose the correct statement:

a) Just as legal rules can be created by custom, they can be abrogated by custom.
b) A court’s task is primarily to apply the law and accordingly new law can never be created by the courts.
c) Parliament is completely sovereign because it is bestowed with the power to create rules of law.
d) The ratio decidendi of a decision is where a judge merely expresses an opinion on a legal principle in
passing, without it being necessary to decide the issue.
e) The doctrine of judicial precedent states that a High Court is bound by the decisions of the Constitutional
Court, the Supreme Court of Appeal and by decisions of other divisions of the High Court.

Question 12:
A well-known blade runner from South Africa is of the opinion that a single judge of the North Gauteng
High Court in Pretoria has erred with the conviction and the sentence that was imposed. The blade
runner can appeal against the conviction and the sentence to the following court:

a) The full bench of any High Court in South Africa.

b) The South Gauteng High Court in Johannesburg.
c) The Pretoria regional magistrates’ court.
d) The blade runner has no right to appeal against his conviction and sentence.
e) A full bench of the North Gauteng High Court in Pretoria.
Question 13:
Which one of the following is the highest legislative authority in South Africa?

a) The Minister of Justice and Correctional Services.

b) The Constitutional Court of South Africa.
c) The Supreme Court of Appeal.
d) The Municipal Council of South Africa.
e) The Parliament of South Africa.

Question 14:
The Roman legal system is usually divided into four main periods of development. One of those periods
was called the “Period of the Emperors” (+/- 27BC – 284AD) and it was characterised by

a) Roman law being inscribed on twelve stone tables that became known as the Law of the Twelve Tables.
b) The development of Roman law reaching its pinnacle.
c) A primitive community, which followed mainly customary law.
d) Roman Law going into a decline.
ClickUP: Week 1&2 Self Assessment

Question 2
The South African common law is based on:

a) English law
b) Roman law
c) Customary law
d) Roman-Dutch law
e) German law

Question 3
Lucas is a famous inventor of new environmentally friendly trucks. He stands in his ultramodern
workshop and admires the revolutionary new electrically powered truck that he designed for the
company, Big Riggs, which still owes him R500 000. The R500 000 owed to Lucas is an example of ...

a) A personal right because Lucas is entitled to institute an action against Big Riggs.
b) An intellectual property right because Big Riggs used Lucas’s creation to make money and did not pay
him.
c) A real right because Lucas can claim the R500 000.
d) A real right because Big Riggs owes Lucas for the ownership they have obtained in the environmentally
friendly truck.
e) A personality right because Big Riggs must still pay Lucas in person.

Question 4
Three judges of the North Gauteng High Court in Pretoria delivered an important judgment in a criminal
case on 10 December 2017. The following courts are bound to this judgment:

a) A single judge of the North Gauteng High Court in Pretoria, the Pretoria regional magistrates’ court and
the Pretoria district magistrates’ court.
b) All the courts in South Africa, excluding the Constitutional Court and the Supreme Court of Appeal.
c) A single judge presiding in any seat of the High Court.
d) All the courts in South Africa, excluding the Constitutional Court, the Supreme Court of Appeal and the
regional magistrates’ courts.
e) All the High Courts in South Africa.

Question 7
Which one of the following is the highest legislative authority in South Africa?

a) The Constitutional Court of South Africa.

b) The Municipal Council of South Africa.
c) The Minister of Justice and Correctional Services.
d) The Parliament of South Africa.
 e) The Supreme Court of Appeal.

Question 14
Which of the following court’s decisions will a full bench of judges in the North Gauteng High Court
in Pretoria be bound to follow?

a) A decision by a bench of three judges of the Supreme Court of Appeal.

b) None of the options provided.
c) A decision by a bench of two judges of the division of the High Court in Cape Town.
d) All previous decisions of the North Gauteng High Court in Pretoria.
e) A decision by a full bench of the High Court in Pietermaritzburg.
Lecture Notes: Self Assessment

SU 1: History of the SA Law and an Overview of the Legal System in SA

Question 1:
In your own words, define the following terms:
 Roman law (1)
 Canon law (1)
 Roman Dutch law (1)
 Corpus Iuris Civilis (1)
 The South African common law (1)
 English law (1)
 Codification (1)
 Parliamentary sovereignty or parliamentary system (1)
 Constitutional dispensation or supremacy (1)

Answer:

❖ Roman law

Roman law forms the basis of most Western European legal systems. It developed over a period of
approximately twelve centuries, from the primitive customs of a rural community to the intricate legal
system of a commercially active world-wide empire. This development is closely linked to the historical
development of the Roman Empire, which can be divided into four periods: The period of Kings (±753-
510BC), Republican period (±510-27BCE), The period of the Emperors (±27BC-284AD) and The Post-
classical period (±284AD-565AD).

❖ Canon law

Canon law or clerical law (church law) was founded on Roman law and played a significant role in the
legal systems of the European territories. The canon law of the Catholic Church (Latin for "canon law":
ius canonicum) is the system of laws and legal principles made and enforced by the hierarchical
authorities of the Catholic Church to regulate its external organisation and government and to order and
direct the activities of Catholics toward the mission of the Church.

❖ Roman Dutch law

The law of the Netherlands consisted mainly of Germanic customary law, which was as primitive as
the simple rural communities to which it applied. Due to the expansion of trade and commerce, a more
efficient and sophisticated legal system became necessary. Since the Roman law still formed a small
part of the legal systems of mediaeval Europe owing to the predominant role of the canon law at the
time, Roman Law was increasingly applied in combination with the law of the Netherlands in the
sixteenth century. This gradual adoption of the principles of Roman law is known as the reception of
Roman law, which resulted in the development of, what is today called, Roman-Dutch law.

❖ Corpus Iuris Civilis

The Corpus Iuris Civilis is the codification of the Roman Law and it consists of the following:

- the Codex: a collection of legislation;

- the Digesta: selections from the works of Roman jurists;
- the Institutes: a textbook for students; and
- the Novellae: a collection of the legislation promulgated after the completion of the Codex.

❖ The South African common law

South African common law is mainly the 17th and 18th century Roman-Dutch law that was transplanted
to the Cape in 1652 with the arrival of Jan van Riebeeck. This forms the basis of modern South African
law and has binding authority, despite the strong influence of English law which was introduced into
South Africa during the British occupations of the territory.

❖ English law

English law was introduced into South Africa during the British occupations of the territory. The
influence of English law on our own law was caused by the following factors:

- English judges and magistrates presided in the South African courts.

- Local jurists studied in England.
- English decisions were applied by the South African courts.
- South African legislation was modelled on English legislation

❖ Codification

Codification is the process of collecting and restating the law of a jurisdiction in certain areas, usually
by subject, forming a legal code, i.e. a codex (book) of law.

❖ Parliamentary sovereignty or parliamentary system.

Parliamentary sovereignty (also called parliamentary supremacy or legislative supremacy) is a concept

in the constitutional law of some parliamentary democracies. It holds that the legislative body has
absolute sovereignty and is supreme over all other government institutions, including executive or
judicial bodies.

During Apartheid in SA, parliament was responsible for the creation of laws and no one could challenge
the laws that were created by a properly constituted Parliament. Parliament was the beginning and the
end of the law of the country no matter how unreasonable and unfair the laws were.
❖ Constitutional dispensation or supremacy

Constitutional supremacy means that the Constitution is the supreme law of the Republic: law or
conduct inconsistent with it is invalid, and the obligations imposed by it must be fulfilled. This means
any law that violates the Constitution, or any conduct that conflicts with it, can be challenged and
struck down by the courts. Since its introduction in SA, it means that although parliament has the
prerogative of drafting laws, any law that is inconsistent with the Constitution of South Africa, 1996
is invalid. The courts have the power to declare any law unconstitutional provided that there are valid
grounds to do so (e.g. the law unfairly discriminates people based on their gender).

Question 2:
2.1 Discuss the Law of Twelve tables. (5)
2.2 Discuss the four significant periods of Roman law. (5)
2.3 Explain what the Germanic tribes did to the Roman law. (5)

Answer:

2.1 The Law of Twelve Tables

In 449 BC, Roman law was written down for the very first time in the form of the Twelve Tables. The
Law of Twelve Tables was compiled by the senate and popular assembly, an assembly of all Roman
citizens among other legislations. This law was known as the law of Twelve Tables because it was
drafted on the twelve bronze plates situated at the market square for everyone to see, read and know
what the law requires of him or her. The law of Twelve Tables contained the substantive law and
procedural law.

→ Substantive law contains the rules that prescribe what is acceptable and what is not acceptable.
- Example: One of the substantive laws was that when one had intentionally burned the building
of another person, that person would be apprehended, flogged and thrown into the fire.
→ Procedural law contains the rules of procedure to enforce substantive law.
- Example: One of the procedural laws was that the law provided that when a debtor was not able
to pay the creditor, the creditor would take the debtor, tie him or her at the Market Square and
call out to the public for anyone who would pay out the debt of the debtor. If no one was willing,
the creditor would sell the debtor as a slave. Alternatively, the creditor would cut and
disembowel the debtor and each creditor would come take a piece of meat.
2.2 The 4 significant periods of the Roman Law

Roman law was first introduced in Rome by its inhabitants in the year 753 BC. There are four significant
periods of Roman Law:

1) The period of Kings (±753-510 BC)

During this period the society was led by Kings and was primitive or simple. The economy was based
on the ownership of land. The kings were regarded as religious, political and economic leaders. The
Kings were assisted by the senate which was known as aristocracy (Upper class). Life was led by the
Fathers in their families and had the power to decide on issues of death and life. The father had the
power to execute his child, if the child transgressed the law.

The law was the rules of customs (established ways of doing things) that were accepted and handed
down from a long period of time. During this period, the law and religion were intertwined. The law
was known as religious secret and was not accessible, and was perceived to be biased towards the upper
class.

2) Republican period (±510-27BCE)

A struggle or conflict ensued between the upper class Roman citizens and the commoners where were
regarded as the lower class citizens of the Rome. The commoners complained that the law was a
religious secret, inaccessible and unfair. Society was developing socially and commercially, thus the
law needed to be developed to cater for this society.

The senate and popular assembly, an assembly of all Roman citizens among other legislations, compiled
the law known as the law of The Twelve Tables. This law was known as the law of Twelve Tables
because it was drafted on the twelve bronze plates situated at the market square for everyone to see,
read and know what the law requires of him or her. The law of Twelve Tables contained the substantive
law and procedural law.

3) The period of the Emperors (27BC-284AD)

During this period the Roman throne was ascended by Emperors. The Emperor became the Head of the
Roman Empire. Roman law reached its peak. It had laws that aimed to achieve equality.

4) The Post-classical period (284AD-565AD)

During this period the Roman Empire was divided into two, the Western Empire and the Eastern
Empire. The quality of the law deteriorated systematically. The logic that characterised the Roman law
disappeared. In 476 AD, the Germanic tribes (originally from the Scandanavia) conquered the Western
Roman Empire. The Western Roman Empire deteriorated socially and economically. The Germanic
tribes also influenced the Roman Law with their primitive law. The Roman law was vulgarised. The
logic, reasonableness, clarity and system of the law disappeared due to the influence of the Germanic
tribes and their primitive law.

However, in the Eastern Empire, Emperor Justinian (527-565AD) made a great effort in preserving the
great Roman law. He was responsible for drafting (codifying) the entire Roman law. The codification
of the Entire Roman law was known as Corpus Iuris Civilis and consisted of the following:

 Codex – legislation (written statutes which are similar to our current Acts)
 The Digesta – important works of Roman jurists (Opinions of jurists).
 The Institutes – basic textbooks of students (which served as commentaries of the law)
 Novellae – Additional and new Legislation compiled after completion of Codex.

Sadly after the death of Justinian, the Roman legal system deteriorated and disappeared due to the
invasions of other cultures who introduced their primitive legal systems.

2.3 The influence of Germanic tribes on Roman Law

In 476 AD, the Germanic tribes (originally from the Scandanavia) conquered the Western Roman
Empire. The Western Roman Empire deteriorated socially and economically. The Germanic tribes also
influenced the Roman Law with their primitive law. The Roman law was vulgarised. The logic,
reasonableness, clarity and system of the law disappeared due to the influence of the Germanic tribes
and their primitive law.

Question 3:
3.1 You are a senior manager at Minerals of Africa Ltd, a coal mine in Mpumalanga. While perusing
the short listing minutes of the short listing committee, for a supervisor position in the section of
Rock Drillers. You discover that one of the applicants was not short listed because she is a woman.
The reason provided by the committee is that the work is physically demanding and women will
not be able to execute their duties in such a section. With reference to the impact of the Constitution
in South African law, especially chapter 2 of the Constitution, explain whether the action of the
short listing committee is valid or not. (5)
3.2 Some union members in the company you work for have decided to enrol for a short course in
labour law to improve their knowledge. They are of the view that any law that was drafted by the
Parliament is final and no one can question that law no matter how unfair the law may be. With
reference to the appropriate principle, explain whether their view is valid. (5)
Answer:

3.1 The fact that one of the applicants was not shortlisted due to the fact that it is a female applicant is
discrimination based on gender. In accordance with Chapter 2 of the Constitution of the Republic
of South Africa, 1996 under section 9, subsection 4, discrimination (either directly or indirectly)
on the basis of gender is unconstitutional. As such, the decision not to shortlist the female applicant
on the basis of her gender is unconstitutional will cannot be viewed as a valid decision. The
decision on whether or not this particular applicant will be shortlisted must be re-evaluated on the
basis of her professional qualifications and experience and whether or not she meets the job
requirements.

3.2 During Apartheid, South Africa operated under Parliamentary sovereignty. Under this system
Parliament was responsible for the creation of laws and no one could challenge the laws that were
created by a properly constituted Parliament. Parliament was the beginning and the end of the law
of the country no matter how unreasonable and unfair the laws were. The workers believe that this
is still the case; however South Africa has adopted the principle of Constitutional supremacy,
which means that the Constitution is the supreme law of the Republic: law or conduct inconsistent
with it is invalid, and the obligations imposed by it must be fulfilled. This means any law that
violates the Constitution, or any conduct that conflicts with it, can be challenged and struck down
by the courts. The courts have the power to declare any law unconstitutional provided that there
are valid grounds to do so (e.g. the law unfairly discriminates people based on their gender). The
workers’ view is therefore not valid.
SU 2: Legal system and Creation of Rules of Law

Question 1:
Define the following terms:

 Law
 Rights
 Law in the subjective sense
 Law in the objective sense
 Custom
 Legislation
 Jurisdiction
 Personality rights
 Intellectual rights
 Appeal
 Stare decisis

Answer:

 Law

Notes: Law is the body of rules which members of the community must adhere to and the aim is to
ensure that members of community live orderly.

Textbook: The law consists of rules that the community must adhere to, that are intended to regulate
society in an orderly way.

Own words: The law refers to a body of rules aimed at regulating a society that must be adhered to by
the community in which it applies.

 Rights

Notes: A right is the legal interest of the subject in an object or a thing (e.g house or a car) which is
protected against other subjects.

Textbook: A right can be described as the legally protected interest of a legal subject (person) in a legal
object or a thing (such as a house or a car), which interest can be protected or enforced against other
legal subjects.

Own words: A right is a legally protected interest of a legal subject (person) in an object or a thing (like
a house or a car) that can be protected or enforced against other legal subjects.
 Law in the subjective sense

Law in the subjective sense refers to the law as it regulates relationships between legal subjects as the
bearers of rights and duties in relation to one another and bearers of rights in relation to the legal objects
(things). The relationship is twofold: subject to subject and subject to object.

Subjective and objective law is a distinction set to differentiate between the application of law onto a
specific case and subject (subjective) and the principles and groundworks that exist independently of
application (objective). A common distinction is that subjective law is “rights”, while objective law is
“Right”.

Subjective law is a set of applications of objective principles onto a specific situation. Its application
differs from case to case. For example, while everyone has a right to free speech, which is an objective
right, the application, extent, and sanctions encountered by those applying this principle differ from
case to another. In a certain jurisdiction, one can claim the right to talk about anything, but some things
cannot be said, such as blasphemy.

 Law in the objective sense

Law in the objective sense refers to the rules and principles of law as they regulate the exercise of
government’s power (Public) and as they regulate the relationships between legal subjects (Private).

Subjective and objective law is a distinction set to differentiate between the application of law onto a
specific case and subject (subjective) and the principles and groundworks that exist independently of
application (objective). A common distinction is that subjective law is “rights”, while objective law is
“Right”.

As for objective law, it is the groundwork of subjective law. It is immaterial, objective, and positive. It
is intended to be the foundation of law. Thus, it contains all fundamental principles that guide written
and unwritten law. For example, in France, Article 9 of the Civil Code states : “Everyone is entitled to
the respect of his private life”. Notice the abstraction and generality of this statement. It is not addressed
to a specific category, although its application could somehow derogate to some exceptions, which
brings us back to subjective law.

 Custom

Custom is an entrenched or a well-established way of doing things that can create a binding unwritten
rule/law.

 Legislation
Legislation consists of rules laid down by a person or a body of persons with legislative authority. In
SA, legislation refers to rules of law that are drafted by Parliament, Provincial legislation and local
government.

 Jurisdiction

Jurisdiction is the official power to make legal decisions and judgements. Jurisdiction is the authority
to hear and decide matters or disputes.

 Personality rights

Personality right is the right of a person to aspects of his/her personality (such as dignity, bodily
integrity, honour, good name, and so forth).

 Intellectual rights

An intellectual property right is the right of a person to the creations of his/her mind or intellect (for
example, copyright or trade mark).

 Appeal

In law, an appeal is the process in which cases are reviewed by a higher authority, where parties request
a formal change to an official decision. Appeals function both as a process for error correction as well
as a process of clarifying and interpreting law.

 Stare decisis

The doctrine of precedent (or stare decisis) is a legal doctrine that obligates courts to follow historical
cases when making a ruling on a similar case. Stare decisis ensures that cases with similar scenarios
and facts are approached in the same way. Simply put, it binds courts to follow legal precedents set by
previous decisions. Stare decisis is a Latin term meaning "to stand by that which is decided."

Question 2:
2.1 Alex designed an original software which was subsequently patented. Company Theeves reverse
engineered his software and sold it on the open market. Alex wants to claim damages for losses
suffered. Name four courts that would be able to decide on this matter and explain how each court
differs from the other. Provide comprehensive reasons for the statements that you make. (15)

Answer: The losses suffered by Alex refers to an infringement on his intellectual property right.
Intellectual rights these are rights that a person has to the creations of his/her mind or intellect (for
example, copyright or trade mark). The actions of Company Theeves can be seen as and infringement
on Alex’s intellectual property right. This will be classified as a civil matter, as civil cases are cases that
arise as result of one person (in this case Company Theeves) causing harm or damage to another (in this
case Alex), their property or personality. There are four courts that can hear civil cases such as this in
South Africa: High Courts, Regional Courts, District Magistrates’ Courts and Small Claims Courts.
However, the court that will be best suited to hear the case will depend on the specific attributes of the
case, such as the claim amount, and the court’s area of jurisdiction.

Although the Small Claims Court would have the jurisdiction to hear this case, the Small Claims Court
has a limit of R20 000 and no legal representation is allowed, therefore this court will not be ideally
suited for this case. Intellectual property cases tend to be complex and would therefore be too complex
to be heard in the Small Claims Court. Any District Magistrates’ Court that serves the district wherein
this case is applicable would be able to hear this case; however the District Court is limited to R200 000
in civil matters. Should the claim be higher than R200 000, this case will not be heard in the District
Court, but rather in the Regional Court or even the High Court. Any Regional Court that serves the
region wherein this case is applicable would be able to hear this case; however, the Regional Court is
limited to R400 000 in civil matters. Should the claim exceed this amount, the case will have to be heard
in the High Court. The High Court has the jurisdiction or the authority to hear and decide on matters of
persons: (a) residing in its area of jurisdiction and (b) all actions that can be heard within its area of
jurisdiction. It is probable that the claim amount will depend on how much the Company Theeves gained
from using Alex’s intellectual property. This will determine which of the above-mentioned courts will
be the best suited to hear the case.

2.2 Alex is an upcoming artist who composes background music for motion pictures. Alex’s
roommate, who composes background music for video games, stole Alex’s flash drive with his
recent compositions and sold it to a video game manufacturing company for remuneration and
without Alex’s consent. Alex confronted his roommate about the theft, whereupon his roommate
posted about the incident on Facebook. The roommate wrote that Alex was incapable of composing
his own music, copies others' ideas and lies about it. Which subjective rights of Alex were infringed
upon?

Answer: A subjective right is a legally recognised and valid claim by a legal subject to a certain legal
object. The first act of Alex’s roommate – stealing the flash drive with Alex’s compositions and selling
the content without Alex’s consent – is an infringement on Alex’s intellectual property right. Intellectual
rights these are rights that a person has to the creations of his/her mind or intellect (for example,
copyright or trade mark). The compositions on the flash drive are the creations of Alex’s mind and are
therefore his intellectual property. Alex, the legal subject has an intellectual property right to his
compositions (the legal object). The second act of Alex’s roommate – posting degrading comments
regarding Alex on Facebook – is an infringement on Alex’s personality right. A personality right is the
right of a person to aspects of his/her personality (such as dignity, bodily integrity, honour, good name,
and so forth). By posting negative comments regarding Alex, Alex’s roommate infringed on Alex’s
(legal subject) right to honour, dignity and a good name (legal objects).

2.3 In each of the following instances, identify the most appropriate court with jurisdiction to hear the
matter and indicate whether this will be a civil or criminal case:
 Alex sues his roommate for telling lies on Facebook. He claims R750 000 in damages.

Answer: The act of Alex’s roommate telling lies about Alex on Facebook is an infringement on
Alex’s personality right (right to honour and a good name). This will be classified as a civil case,
as civil cases are cases that arise as result of one person (in this Alex’s roommate) causing harm or
damage to another (in this case Alex), their property or personality. Since this is a civil case with a
claim of R750 000, the case would be heard in the High Court. The High courts have the jurisdiction
or the authority to hear and decide on matters of persons: (a) residing in its area of jurisdiction and
(b) all actions that can be heard within its area of jurisdiction. Although District and Regional
Magistrates’ Courts can also hear civil cases, this case cannot be heard by a District or Regional
Magistrates’ Court, as civil case claim limit for these courts are R200 000 and R400 000,
respectively.

 Alex’s roommate is accused of theft. The public prosecutor wants to push for imprisonment of
2 years or a fine of R100 000.00 upon a guilty conviction.

Answer: Criminal cases are cases that arise as result of actions that transgress the norms of society
and the transgressions are punishable by the state to ensure orderly living. In criminal matters,
crimes are investigated by the police, after which prosecution is instituted against the offender by
the National Prosecuting Authority on behalf of the State. Although Alex’s action of stealing the
flash drive with Alex’s compositions on is also an infringement on Alex’s intellectual property
right, which could be a civil matter wherein Alex claims for damages, the act also breaks the law
and is seen as theft, which is a criminal offence. Since Alex’s roommate is accused of theft and the
public prosecutor wants to push for imprisonment of 2 years or a fine of R100 000, this case will
be classified as a criminal case. Although this case can be heard by a District or Regional
Magistrates Court or even a High Court, based on the period of imprisonment (2 years) and fine
amount (R100 000), the most appropriate court would be a District Magistrates’ Court with the
 jurisdiction to serve the area wherein this case is applicable. The District Magistrates’ Court has a
limit for fines of R120 000 and a maximum of 3 years imprisonment.

 Alex roommate severely assaulted Alex when Alex confronted him about the theft. If found guilty
after prosecution by the State, his roommate will face imprisonment of 15 years.

Answer: Criminal cases are cases that arise as result of actions that transgress the norms of society
and the transgressions are punishable by the state to ensure orderly living. In criminal matters, crimes
are investigated by the police, after which prosecution is instituted against the offender by the
National Prosecuting Authority on behalf of the State. Alex’s roommate assaulted Alex and thereby
broke the law. This act will be investigated by the police and Alex’s roommate will be prosecuted
by a National Prosecuting Authority. The case will therefore be classified as a criminal case. Since
the period of imprisonment is 15 years, this case can either be heard in a Regional Magistrates’ Court
or a High Court with jurisdiction within Alex’s residential area. However, 15 years of imprisonment
is the maximum number of years that can be heard in a Regional Magistrates court and therefore it
would be more suitable for this case to be heard in a High Court.

If Alex wants to sue his roommate for telling lies on Facebook, and he wants to claim R750 000 in
damages, would he make use of the action or application procedures? Provide reasons for your answer.

Answer: In a case where there is a material dispute of facts, one has to use action proceedings. Based on
the fact that Alex’s roommate has posted statements that could be seen as defamation and that the facts
presented in his post reflect a different story to the facts of the case, this can be seen as a material dispute of
facts between Alex and his roommate. Furthermore, since the infringement on Alex’s personality right (right
to honour and a good name) is not a case that is easily proven by concrete facts and relies on some subjective
aspects, there will be an inherent dispute of material facts. As such, Alex would have to make use of action
proceedings, wherein Alex (the plaintiff) will issue summons and his roommate (the defendant) will file a
plea (which seeks to defend allegations made in the summons). The case will end up in court where witnesses
will be called to prove the versions of the plaintiff and defended. Ultimately, the judicial officer will weigh
the evidence in support of each version and grant judgment in favour of the person who presented a version
of events and evidence that are probable. (Balance of probabilities).
Online Test 1

Question 4
The National Prosecuting Agency entered into various contracts with private investigators in terms of which the
National Prosecuting Agency hired the investigators to assist the police and prosecutors with investigating high-
profile cases. The investigators submitted invoices for payment for their services in the amount of R2 million but
the National Prosecuting Agency refused to remunerate them for their services. Which court would have
jurisdiction to hear the investigators' claims for payment and what type of matter would it be?
a) The High Court and it would be a criminal matter.
b) The Constitutional Court, as this is a matter relating to a government agency, and it would be a criminal
matter.
c) None of the mentioned options.
d) The Constitutional Court, as this is a matter relating to a government agency, and it would be a civil
matter.
e) The High Court and it would be a civil matter.

Question 5
Lindokuhle instituted action against June because June did not pay Lindokuhle for the services that she rendered
in terms of a valid contract entered into between them. In terms of the contract, June owed Lindokuhle R350 000.
Lindokuhle was successful with her court case but June disputes the outcome. June wants another court to decide
on the matter. Which of the following statements is the most correct?
a) June may appeal from the regional Magistrates' Court to the Supreme Court of Appeal. June will be
known as the appellant in the High Court appeal case notwithstanding that Lindokuhle was the plaintiff
in the initial Magistrates' Court case.
b) June may appeal from the regional Magistrates' Court to the High Court. June will be known as the
respondent in the High Court appeal case because she was the defendant in the initial Magistrates' Court
case.
c) June may request that three magistrates from a district Magistrates' Court hear the matter anew. June will
be known as the appellant before the district magistrate notwithstanding that Lindokuhle was the plaintiff
before the initial regional magistrate.
d) June may request that three magistrates from the same regional Magistrates' Court hear the matter anew.
June will be known as the appellant before the three magistrates notwithstanding that Lindokuhle was
the plaintiff before the initial magistrate.
e) June may appeal from the regional Magistrates' Court to the High Court. June will be known as the
appellant in the High Court appeal case notwithstanding that Lindokuhle was the plaintiff in the initial
Magistrates' Court case.

Question 8
In the 1100 AD, interest in classical Roman legal system was revived by (choose the correct option):
 a) Novellae
b) Justinian
c) Codex
d) None of the options
e) Glossators

Question 9
Emperor Justinian was responsible for the (choose the correct option):
a) Codification of the entire French law.
b) Codification of the entire Germanic law.
c) Codification of the entire Roman law.
d) Codification of the entire Scandanavian law.
e) Codification of the entire English law.

Question 11
Cameron downloaded music composed by Buhle off the internet and sold it to all his friends. Choose
the correct option to complete the sentence: In respect of the music, Cameron infringed on Buhle's
_________

a) Personality right
b) Personal right
c) Human right
d) Intellectual property right
e) Real right

Question 12
Cameron stole the laptop that belonged to Buhle's and sold it to Jessy. Choose the correct option to
complete the sentence: In respect of the laptop, Cameron infringed on Buhle's _________

a) Real right
b) Personality right
c) Intellectual property right
d) Human right
e) Personal right
THEME 2: GENERAL PRINCIPLES OF THE LAW OF CONTRACT LAW

SU 1: History of the South African Law of Contract, an Overview of Legal

Obligations and the Transfer of Rights and Duties

Learning material
Business Law chapter 2 (excluding par 2.12 (g))

Learning objectives
After studying this section you should be able to demonstrate your understanding of the historical
development of the law of contract, and the basic principles relating to legal obligations and the
transfer of rights and duties:
1. Explain how a legal obligation and contract was founded in Roman and Roman-Dutch law
respectively;
2. Demonstrate your knowledge and understanding of a legal obligation, with specific reference to
2.1. The definitions of, and relation between, a "legal obligation" and "juristic fact";
2.2. The elements or requirements for a legal obligation;
2.3. The meaning of, and differences between, a "civil" and a "natural" obligation;
2.4. The general sources of a legal obligation;
2.5. The requirements for a delict and contract needed to create a legal fact;
2.6. The interaction between delict and contract in respect of the same set of facts
3. In the context of a contract,
3.1. Define, identify and differentiate between, the concepts "contract", "contractual rights",
"contractual duties", "debtor", "creditor", "cession", "delegation" and "assignment";
3.2. Explain how a contract is founded in South African law;
3.3. Define, and explain the difference between a "nominate" and "innominate" contract;
3.4. Explain the similarities and/or differences between the South African, Roman and Roman-
Dutch law of contract respectively;
3.5. Explain the importance of Roman-Dutch law for the contemporary South African law of
contract;
 3.6. Explain the importance of the following laws for the contemporary South African law of
contract:
3.6.1. Consumer Protection Act 68 of 2008;
3.6.2. National Credit Act 34 of 2005;
3.6.3. Basic Conditions of Employment Act 75 of 1997.
4. In the context of cession, explain
4.1. How rights are transferred by means of cession;
4.2. The roles of the parties involved in cession; and
4.3. The rules that apply to cession;
5. In the context of delegation, explain
5.1. How rights are transferred by means of delegation;
5.2. The roles of the parties involved in delegation; and
5.3. The rules that apply to delegation;
6. In the context of assignment, explain
6.1. How rights are transferred by means of assignment;
6.2. The roles of the parties involved in assignment; and
6.3. The rules that apply to assignment;
7. Apply the abovementioned principles/law to relevant but unfamiliar scenarios to solve practical
problems.

Brief history
❖ The foundation of the South African law of contract is the Roman law and Roman Dutch law.
❖ Roman law of obligations created a legal relationship, or connection between two legal subjects,
where rights and duties were created and recognised in law.
❖ The rights and duties were known as personal rights.
❖ Roman law never developed to such a stage where all agreements entered into with a serious
intention to be legally bound were recognised as contracts.
❖ On the other hand, Roman Dutch law was influenced by canon law and as a result recognised all
agreements entered into with the intention to be legally bound and where other legal requirements
are complied with as contracts.
❖ Historically, legal obligations consisted of two elements, the right of the creditor to demand
performance and the duty of the debtor to perform.
Legal obligation
• A legal obligation is a legal relationship between two legal subjects created by a legal fact or
juristic fact or bases such as contract or delict to create personal rights and duties between the legal
subjects.
• Where rights and duties are recognised and enforced by law they create a civil obligation.
• Where rights and duties are recognised but not enforced by law, are known as natural obligation.
(Wager)
- Wager A and B each undertake that they will pay R2000 to the other upon the happening of an
uncertain event. E.g. A undertakes to pay B R2000 if Kaizer Chiefs wins against Pirates and B
undertakes to pay A R2000 if Pirates wins against Kaizer Chiefs.
- Wagers are contracts but not enforced by law.
• This means that legal obligations are sources of all personal rights. These rights are recognised
by law and are enforceable and sometimes they are recognised by law but not enforceable.

Sources of obligations
➢ Only specific juristic facts or legal facts create legal obligations, the most important are contract,
delict, statute and administrative authority. Other legal facts or juristic facts give rise legal
obligations and have been developed for particular purpose (ad hoc basis) to address a particular
problem or satisfy the needs of the community.
- E.g. in unjustified enrichment where a Bank mistakenly deposit R5000 to you and you decide
to spend the money or in cases of maintenance where a parent’s duty to support his or her
children is enforced.
➢ Juristic or legal facts must meet specific requirements to create legal obligations.
- Delict must have all the elements which are act/omission, unlawfulness, culpability/fault,
causation and damages.
- Contracts must meet specific requirements before they can create legal obligations and these
requirements are:
• consensus,
• contractual capacity,
• legality,
• physical possibility,
• certainty and
• requirements pertaining to formality (in terms of statute or agreement by parties).
Concept of a contract
▪ A contract is an agreement between legal subjects which is based on:
- Consensus (meeting of two minds)
- Between subjects with contractual capacity (capable of understanding the terms of contract)
- Has to be legal (in line with public policy or norms of society)
- Must be physically possible
- And sometimes meet certain requirements
- It must be made with the serious intention to be bound or creating legal obligations which
give rise to rights and duties. [The serious intention to create legal obligations sets contracts
apart from social agreements. E.g. Agreement to meet for gym or soccer with friends.]
▪ Thus, a contract is an agreement between legal subjects which is based on consensus (meeting
of minds), where parties have contractual capacity (attributes that enable them to appreciate the
terms of contracts), where it is lawful, physically possible, and where certain formal
requirements are complied with and made or entered into with the intention of creating legal
obligations that create rights and duties.

Interaction of Delict and Contract from the same set of facts

o Delicts and Contracts are sources civil obligations. In other words, they are legal or juristic facts
that create personal rights and duties.
o Delict → when one person through his or her act that is unlawful; negligently cause damage to
another’s property.
- Textbook: A delict will only give rise to a legal obligation where the following elements are
present: conduct (an act or omission), unlawfulness, fault (intent or negligence), and causation
and damage.
o Contract → agreement between parties where parties reach consensus, where they have the
contractual capacity, where the agreement is legal, where the agreement is physically possible,
where formalities are complied with, and where they have serious intentions to be legally bound
and thereby to create rights and duties.
- Textbook: A contract is an agreement (based on consensus between subjects having
contractual capacity, which agreement has to be legal, and physically possible, and which
sometimes has to meet certain formal requirements) made with the serious intention of
creating a legal obligation that, in turn, gives rise to the parties’ rights and duties. The serious
intention to be bound to the agreement distinguishes a contract from an agreement of a social
nature (for example, to meet for lunch).
o These sources of civil obligations interact.
 Example: Sam enters into a valid contract with the Super Bike mechanic Jacque to fix his Bike for
R7000. Jacque, while fixing the Bike accidentally sets it on fire and it is completely damaged. The
value of Sam’s Bike is R14000.
 Here the contract created the civil obligation or personal rights for both parties. Sam has personal right
to have his Bike fixed and duty to pay and Jacque has the right to R 7000 as payment for work and the
duty to fix the Bike.
 The delict here is also applicable. Jacque’s act of setting the Bike alight is unlawful, negligent, caused
damage and his actions legally caused the damage.

Unjustified enrichment
 Unjustified enrichment as a legal or juristic fact is a source of civil obligation. It creates a
personal right.
 It can be defined as the retaining of a benefit (as money) conferred by another when principles of
equity and justice call for restitution to the other party
- B Bank accidentally deposits money into A’s account, A decides to go spend the money in Cape Town.
This amounts to unjustified enrichment and thus A owes B Bank the money. B Bank has a personal
right against A.

Consumer Protection Act 68 of 2008, National Credit Act 34 of 2005 (‘NCA’) and Basic
Conditions of Employment Act 75 of 1997
Consumer Protection Act 68 of 2008
• The aim of the CPA is to create a consumer market that is fair, accessible, efficient, sustainable
and responsible for the benefit of all consumers.
→ To also ensure that all consumers especially the disadvantaged have access to the consumer
market.
→ To also promote fair business practices
→ To also prevent unscrupulous behaviour (fraud) towards consumers
→ To promote access to information to ensure responsible and informed consumer choices.
→ To also create an efficient system of redress.

National Credit Act 34 of 2005 (‘NCA’)

• The aim of the NCA is to ensure social and economic transformation of South Africa. This is
done by promoting fair, transparent, competitive, efficient and accessible credit market for
all, especially the previously disadvantaged.
• Aims to:
- combat unfair credit, credit marketing practice and protect all users of credit
- prevent reckless borrowing, over indebtedness, reckless lending
- create an efficient system of debt restructuring and enforcement
Basic Conditions of Employment Act 75 of 1997.
BCEA provides basic minimum conditions of employment contracts such as sick leave, annual leave,
and working hours. The aim is to promote the well-being of the employees.

Nominate and innominate contract

❖ Nominate contracts → agreements with specific names and the law prescribes certain terms or
essentialia for these contracts to be effective (e.g. lease, sale contract)
❖ Innominate contracts → agreements that do not have names. (Permutation: Contract of exchange,
where A undertakes to make goods available to B and B also undertakes to make goods available
to A.)

Transfer of rights and duties

➢ Contracts create rights and duties. One of the parties may not wish to exercise his or her rights
and to perform his or her duties. This party may be substituted by a third party.
➢ Rights may be transferred to another through Cession and
Combination = Assignment
➢ Duties may be transferred to another through Delegation.

Cession
A sells his watch for R 1000 to B, but instructs the R 1000 to be paid to C, his cousin brother who is
celebrating his birthday. A is the Cedent and C is the Cessionary.

A’s personal right to the purchase price from B is ceded to C. C can demand or claim this R1000 from
B on condition that:
- A as the cedent and C the cessionary conclude or enter into a contract of cession.
- The consent, knowledge or co-operation of the debtor B is not a requirement. If the debtor pays
the cedent A or original creditor, then the debt is closed. The cessionary C cannot claim the money
from the debtor B. Thus the cedent A must timeously inform the debtor B to pay the cessionary C.
- Absolutely no formalities are allowed.
- All personal rights can be ceded except where the rights are of a highly personal nature. (Where A
and B agree that B will provide soccer training to A.
- A personal right can only be ceded as a whole (entirety) not in parts.
- The rights are transferred in terms of the rule nemo plus iuris principle which means that no
one can transfer more rights than he or she has. This means that only the original rights together
with all the attributes (advantages and disadvantages) can be transferred.

Delegation
A loans R 1000 to B. B the debtor to A delegates his duties to C (new debtor) to pay the loan money to
A.

As it is essential for the creditor to know the debtor, the consent of the creditor is required before
delegation can take place. Thus, delegation is an agreement of three subjects: the creditor agrees to
delegation, the original debtor undertakes to transfer his duties to the new Debtor and the new Debtor
agrees to pay the loan money.

Assignment
Assignment in essence is when one party is substituted by a third party as a debtor and creditor at the
same time. A agrees to cut B’s grass for R 50 and A assigns his rights to R50 and his obligation to cut
B to C. Here we see cession or delegation. The three parties must agree that C becomes the debtor and
creditor. See here that all rights and duties of A are transferred to C.
SU 2.1: Consensus as a Requirement for the Formation of the Contract

Learning material
Business Law paragraph 3.01

Learning objective
After studying this section you should be able to list and explain the general requirements for a valid
contract. After studying units 2.1.1 – 2.5, you should be able to demonstrate your knowledge and
understanding of/insight into the requirements for a valid contract.

SU 2.1.1: Consensus and the Formation of the Contract

Learning material
Business Law paragraphs 3.02 – 3.36; 10.11 – 10.12

Learning objectives
After studying this section you should be able to demonstrate your understanding of the role of
consensus when it comes to the offer and acceptance of the offer. In particular, you must be able to:

1. State and explain the requirements and categories of consensus;

2. Demonstrate your understanding of a declaration of intent, the role of the offer and acceptance
when it comes to the declaration of intent and the concomitant requirements for consensus;
3. Define an "offer", list and discuss the requirements for a legally valid offer;
4. Explain how an offer is terminated;
5. Define an "acceptance", list and explain the requirements for a legally valid acceptance;
6. Discuss "public offers" and "auctions" as particular types of offers;
7. Define an "option", a "preferential right" (a right of pre-emption) and a "negative offer"; and
distinguish these concepts from each other;
8. Explain the impact of the Consumer Protection Act on offers;
9. Discuss the position of multiple parties to a contract, in particular:
9.1. Explain co-liability and entitlement;
9.2. Explain joint and several liability and entitlement;
9.3. Joint or common liability and entitlement;
9.4. Vicarious liability;
9.5. Explain the difference between 9.1, 9.2, 9.3 and 9.4;
10. Apply the abovementioned principles/law to relevant but unfamiliar scenarios to solve practical
problems.

Introduction
As you will recall before a contract can be valid, certain requirement must be complied with. These are:
❖ Consensus → meeting of intentions or minds in all aspects of the contract.
❖ Contractual capacity → parties must be capable of forming an intention and appreciate the terms
and conditions.
❖ Legality → contracts must be in line with the accepted morals of the society.
❖ Physical possibility and certainty → must be possible to perform and the performance must be
determinable.
❖ Formalities → contract must comply with some formalities in terms of the law. (E.g. some
contracts must be in writing such as contracts of sale of land or a house.)

In this study unit and the next we are dealing with consensus/meeting of minds or intentions from the
legal subjects in the contract.

What is consensus?
Meeting of intentions
▪ Consensus forms the foundation or the core of the contract and is the result of the communication
or serious talk between the parties.
▪ When each party has communicated their will or intention in the contract and these intentions talk
to each or agree with each other in all aspects then consensus is reached.
▪ Consensus is present when:
- When parties have serious intentions.
- Their intentions in the contract are the same or identical through co-operation or deep
communication.
▪ The creation of obligations legally creates rights and duties which have a patrimonial or
economic value.

Three types of consensus

 True consensus → reached expressly; through spoken words or conduct (tacitly) such as delivery
and payment of price without spoken words.
 Assumed consensus → from terms implied by the parties such as terms that may be deducted or
inferred from the undertaking of the parties.
- Textbook: Assumed consensus is that which is deemed to exist between the parties. Such
assumed consensus can influence some or all of the terms of a contract. Unlike actual
consensus, consensus is merely deemed to exist in this case. Two possibilities exist in which
consensus can be deemed, namely stipulations by necessary implication (implied terms) and
the terms of a ticket contract.
 Consensus by operation of law → legislation, trade usage or common law.
Consensus and formation of contracts
➢ Communication and understanding between the parties is required before consensus can be
reached. The intentions of the parties cannot be legally determined if they are not disclosed or
communicated.
➢ Disclosure takes place through a serious communication or negotiation where parties make their
intentions known.
➢ These disclosures can be made in writing, verbally (orally or spoken word), by conduct or operation
of the law. In other words: intentions (undertakings) in the contract can be disclosed in the above-
mentioned ways.
➢ These disclosures of intention can be divided into three:
- First mere invitation or advertisement, request for proposal/offer or tender (does not create legal
obligations).
- Second an offer when accepted creates legal obligations.
- Third an acceptance that creates legal obligations.
➢ An acceptance that is qualified or accepted conditionally is a counteroffer.
- E.g. in the contract of sale of house, where A the seller sells the house for R 400 000 and the
buyer B accepts the offer in on condition that the house is sold at R 350 000.
➢ The nature and the contents of the parties’ intentions will determine the type of communication
between the parties.
➢ The law will determine whether the communications can be informal or must comply with certain
requirements.

Instances where consensus will appear to have been reached but in actual fact it is not
 Generally consensus will be reached when the intentions of the parties are the same and has been
reached through co-operation.
 However, there are instances where there would be an impression that consensus has been reached
only to find that there are factors that have rendered the consensus void (invalid) or voidable
at the wishes of either party in agreement.
 The factors are error (forming an impression that it is a Merc only to find it is a BMW),
misrepresentation (car is a 2001 whereas is a 1999 model), duress (coercion/threat/force),
undue influence (weakening one’s power to resist e.g. the doctor of an ill patient influences a
seriously ill patient to transfer his property to him) and commercial bribery.
What is an offer?
 An offer is a declaration of intent by a potential party in a contract which contains a proposal of
the contents of contract and when accepted would form legal obligations/contract.
 This means that the offer must clearly declare intentions of one party of the contract, must have
contents or undertakings by one party of the contract, and be in such a way that when accepted
must create a contract.

Difference between offer and invitation

An offer should be distinguished from a mere invitation. However, in certain circumstances an
invitation/advertisement can be an offer if it is detailed and comprehensive that it complies with the
requirements of an offer. The intention of the advertiser will determine whether it is invitation or an
offer.

Requirements of an offer
 The offeree must know about an offer.
 All essential elements of the offer must be present and all elements that are included by law or implied
must be present. The offer must be detailed and cover all aspects of the offer (comprehensive).
 The offer must be clear, easily determinable and not be unambiguous (not be capable of two meanings).
 No formalities are required unless provided by law or by parties,
 The offer must be made with the intention to create obligations and the offeror must be legally bound
by his offer. (This is not a mere invitation, or tender, offer or proposal or invitation to a social gathering
or lunch.)

Termination of offer
➢ An offer does not create legal obligations but it is legally relevant.
➢ It creates an expectation that the acceptance will create legal obligations.
➢ However, it can be terminated or come to an end.
➢ It can be terminated in the following manner:
- Rejection of an offer where the offeree rejects it expressly (by words) or tacitly (by conduct).
And where a counteroffer is made. This means that the first offer is rejected.
- The offer can be revoked (withdrawn) before acceptance and this must come to the knowledge
of the offeree.
- Offers are placed before offerees for certain duration. If the duration lapses the offer lapses.
A reasonable duration will be used if the is no duration set.
- Since an offer does not create legal obligations. Death of the offer or offeree before acceptance
terminates the offer. And rights of the offer cannot be transferred(ceded)
- Contractual incapacity terminates an offer. (Where one of the parties loses his ability to form
a contract and to appreciate the terms and conditions).
Special offers

Public offers
▪ Offers can be made to individuals or groups. In other circumstances, it can be made to the general
public.
- E.g. Where an investigator offers R20 000 for information about the identity of the person who
vandalised a liquor store.
▪ The offeree from the general public would accept the offer by inquiring from other members of the
community or the public.

Auctions
o In auction we have ‘auction with reserve’ and ‘auction without reserve’. [Check Textbook for
detailed explanation]
o Distinguish between agreement about rules of the game and contract through process of auction.
o Rules of the game may provide that the auction is ‘with reserve’ or ‘not’.
o Auction ‘with reserve’ is when the auction has terms and conditions and ‘without reserve’ is when
auction is without terms and conditions.
o ‘Without reserve’ → no terms and conditions.
o ‘With reserve’ → the auctioneer merely invites bidders and bidders make an offer. The auctioneer
is not obliged to accept the offer even the highest one. [E.g. 10% deposit and payment of the price
within 10 days. Participation means consent.]
o ‘Without reserve’ (simple auction) → the auctioneer makes an offer and the when the highest
bidder accepts, auctioneer is obliged to sell.
o Where the rules of the game of auction does not provide that the auction is with reserve or not,
then auction is ‘with reserve’.
o If Consumer Protection Act 68 of 2008 (‘CPA’) is applicable the following must be complied with:
- Notice in advance must be given if auction is with reserve (subject to reserve or lowest price
the seller is willing to sell)
- Notice must be given if the owner, auctioneer or representative will participate. If not given,
the sale may be declared fraudulent by court.
- When goods are sold in lots each lot is a separate sale.
- A contract or sale auction is complete when the auctioneer announces it (word, fall of the
hammer or common practice)
- The minister of Trade and Industry has provided regulations that are applicable to ensure that
auctions are fair and just.
Options
 Option is when the offeror of the substantive offer in the contract makes an option offer to keep
open the offer for a period of time within which the offeree must accept.
 The parties (offeror and offeree) must agree that an option agreement is concluded.
 The option offeror is known as a grantor.
 The option agreement creates rights and duties that can be transferred.
 Where the holder of the option does not exercise the option the substantive offer is terminated.
 The option agreement must meet all the requirements of a contract before it can be valid.
 The offer and acceptance of the substantive contract must meet all the requirements of a contract.
 e.g. A offers to sell his house at Stand number 76, Pilchard road, Midrand to B for R 1Million. A
also offers to keep this offer open for B for next 5 months.
- This is a substantive offer to sell the house and an offer to grant an option (to keep open the
offer for 5 months).
- B must unconditionally accept the substantive offer and the offer of option.
- It may be terminated by not exercising an option or by performance.

Distinguish between Option and Preferential right

• Preferential right is the right given by the offeror to the offeree to prefer or make an offer first to
the offeree before anyone, should the offeror decide to start or open negotiations or make an offer
in a contract.
• Here there is no substantial offer for contract but refers to a situation where the offer or grantor of
the preferential right (right to be offered first) should decide to make an offer.
• The grantor of the preferential right is obliged to make the offer first to the offeree should he decide
to initiate or make an offer.
• E.g. A undertakes to give B preferential rights (offered first) to buy her house should she decide to
sell one day. There should be a contract of preferential right between A and B. B can decide to
exercise the preferential right or not buy the house.

Negative offers are prohibited

Negative offers (options) are offers that are made by offers by delivering goods to the purchasers and
accepted when the goods are not returned. CPA prohibits these offers.

Multiple parties in contracts

Generally, there is a creditor and a debtor in a contract. However, in some instances there are multiple
creditors and multiple debtors. In other words, there are multiple subjects in a contract. The issue in this
case is how rights and duties are dealt or shared between the multiple parties. [E.g. 3 Creditors and 3
Debtors in a contract.]
Simple joint liability of entitlement
In a case where X and Y owe R150 to B and C. X and Y are liable to pay R75 each and B and C are
entitled to R75 each. Performance must be divisible and this is by operation of the law.

Joint and several liability and entitlement

• Refer to example above: Either debtor can pay full amount to either creditor. This means that X or
Y can pay the full amount to B or C. If X pays R150 to C, it means that Y must pay R75 to X and C
must pay R75 to B.
• Parties must agree to be jointly and severally liable.
• If no agreement, parties must pay equal amounts.
• This is created by statute or agreement by parties.
• The party who paid in full has the right of recourse or the right to claim from the party who did not
pay. These principles apply equally to creditors.
• Performance has to be divisible.
• Partners in a partnership are jointly and severally liable.
• Joint liability and entitlement and jointly severally liable can be combined.

Joint or common liability and entitlement

Where performance is not divisible or jointly and several liability and entitlement are not prescribed
by law or parties, debtors are entitled to one indivisible performance from creditor. E.g. Where two
joint owners of a house are entitled to one Air conditioner in their house, the Air conditioner installers
will install one conditioner for the benefit of both of them. They are not entitled to half an air
conditioner.

Vicarious liability
 As a sole proprietor that manufactures and installs air conditioners, as an employer you may in
some instances delegate some of the installation duties to employees. If your employees
negligently cause damage to the property of your client while installing air conditioners, you will
be vicariously liable for damage done by your employees in the scope of their employment.
 This means that the employer will be jointly and severally liable for the damage caused by
employees. (employer will pay full amount and claim from the employee)
 In other words, as an employer you will take the position of your employees for negligent actions.
 Not applicable in criminal matters.
SU 2.1.2: Consensus and the Content of the Contract

Learning material
Business Law paragraphs 3.37 – 3.97

Learning objectives
After studying this section you should be able to demonstrate your understanding of the role of
consensus when it comes to the content of the contract (and against the background of study unit
2.1). In particular, you must be able to:
1. Explain, and differentiate between, the following on an elementary level:
1.1. How actual consensus can be obtained expressly;
1.2. How actual consensus can be obtained through conduct;
1.3. How consensus can be "assumed" and how assumed consensus is established;
1.4. How consensus can be obtained through operation of law;
2. Define, explain, compare and provide examples of the following in the context of express
consensus:
2.1. Provisions of a contract;
2.2. Essentialia of a contract;
2.3. Incidentalia of a contract;
2.4. Suspensive conditions of a contract;
2.5. Resolutive conditions of a contract;
2.6. Suspensive terms of a contract;
2.7. Resolutive terms of a contract;
2.8. Assumptions;
2.9. Guarantees;
2.10. Modal clauses.
3. Define, and explain the following in the context of assumed consensus:
3.1. Implied terms and the requirements that have to be proven before a court will deem such a
condition to form part of a contract;
3.2. Ticket contracts and the requirements that must be present before a party is legally bound to
the terms of a ticket contract;
3.3. The impact of the Consumer Protection Act on ticket contracts;
4. Define, and explain the following in the context of consensus through operation of law:
4.1. The common law and naturalia of a contract;
4.2. Legislation;
4.3. Trade usage and the requirements needed for such usage to constitute consensus;
5. Explain, discuss and analyse the impact of the Consumer Protection Act on the contents of a
contract [see also outcome 3.6.3 of syllabus theme 2 study unit 1 above], specifically its influence on:
5.1. "Fairness" in contracts;
5.2. Plain and understandable language in contracts;
5.3. Unfair, unreasonable or unjust terms;
5.4. Prohibited transactions,a greements, terms and conditions;
5.5. Return of goods;
5.6. Cancelling advance reservations or orders;
5.7. Implied warranties.
6. Apply the abovementioned principles/law to relevant but unfamiliar scenarios to solve practical
problems.
Contents of the contract
o A contract is concluded when the offer, subject to other requirements, is accepted.
o In other words, the declarations of intent of the parties must correspond and be the same.
o The contents of each contract must be determinable from the declarations of intent by the parties.
o These declarations of intent are a consensus between the parties.
o However, contracts are usually wider than the terms found in the declarations as some of the terms
will be implied by law and assumptions.
o Consensus is divided into divisions.

Consensus
Actual consensus
 Parties actually reach consensus expressly (words/writing) or by conduct and the law will also
bring other terms in the contract and these terms that come by operation of the law are known as
naturalia.
 These are automatically applicable and do not depend on the contract or agreement.

Express consensus
The contents of the contract as determined by actual consensus are known as essentialia, incidentialia,
conditions, terms, assumptions, guarantees and actual modus.

Essentialia
• These are the basic minimum characteristics of a nominate contract or specific contract that
distinguish it from other contracts.
• Consensus on these minimum characteristics of the contract must be reached. Without them there
is no specific contract.
• They are not validity requirements.
• e.g. in the contract of sale:
- The nature of the contract is to buy and sell. (objective/aim of the contract)
- The item or thing to be sold (object of the contract)
- The price. (money to be paid to gain the object)
• These characteristics make the contract of sale and distinguish it from the contract of lease.
• This means that a consensus on other requirements of the contract can be reached without reaching
consensus on the essentialia and a contract would be valid.
• But will not qualify as a contract of sale (nominate contract).

Incidentialia
These are terms that parties can reach consensus on to suit their respective circumstances. [E.g. payment
of money on the last day of the month or taking possession of the property on the last day of the month.]
Conditions
 Conditions do not refer to terms, guarantees, assumptions or modal clauses but refers to the
circumstances where performance of all or some duties by one of the parties depends on the
occurrence of an uncertain event future event.
 There are suspensive and resolutive conditions.
 These do not prevent the existence of the contract but the enforcement of the contract or the
continued existence depends on it.
 Event must not be illegal or contrary to the aim of the contract.
 Where no time frame is given for the condition, reasonable time will be applicable.
 Where one party unreasonably prevents the condition to happen then fictitious fulfilment of the
condition will be assumed.

Suspensive conditions
Suspensive conditions refer to a situation where performance cannot be claimed until the occurrence
of the condition. The non-occurrence of the condition suspends the enforcement of the contract.
 E.g. A agrees to sell his crops to B and B buys the crops. This is on condition that the crops will
successfully grow and A will harvest. The contract is sealed but subject to a suspensive condition.
B can only claim the crops unless A’s crops have grown and has harvested. A cannot destroy his
crops.

Requirements of suspensive conditions:

➢ Only enforceability of the contract is affected not validity.
➢ A condition must refer to a future event.
➢ The future event must be uncertain.

Resolutive conditions
Resolutive conditions refer to a situation where the continued existence of the contract depends on the
occurrence of an uncertain future event.
 E.g. B agrees to lease A’s property for the next 5 years on condition that Covid 19 will be resolved
and things will go back to normal in the next 2 years.

Requirements of resolutive conditions:

✓ Contracts exists
✓ The condition must be uncertain and refers to the future.

The circumstances of the contract will determine the consequences of termination.

Terms
Terms is when the enforcement of the contract or continued existence depends on certain future event
even if not known when it will happen.

➔ Suspensive term: The possession of the car is transferred after the death of the seller. The
occurrence of the certain future event leads to enforcement and non-occurrence leads to suspension
of enforcement.
➔ Resolutive term: A can occupy the leased property until he dies or reaches the age of 50.

Assumptions
Assumption is when parties assume that a certain specific fact exists. Consensus must be reached
on the bases of the actual existence of the fact and if not, then there is no contract.

E.g. B agrees to buy C car on assumption that the car has been serviced annually or upon covering
15km per annum throughout its life span. If this is not the case then no consensus is reached.

Guarantees
➢ Guarantee refers to the affirmation or undertaking that a legal fact exists or not.
➢ E.g. A sells his BMW to B and guarantees that it was serviced by Charmain a well-known BMW
specialist mechanic in the country. If this is not the case, then A will be held liable for material
non-performance. A will be in breach of a guarantee. No fault is required before A can be held
liable.
➢ Guarantees may be made expressly, tacitly (from circumstances) and apply by operation of the
law.

Modus clauses
Modus is where one party in a contract places a duty on the other party to do a specific performance.
B sells his land to C for R7000 and requires C to build a park for the community. Modus refers to a
future event.

Contents based on assumed consensus

▪ Assumed consensus is that which is taken or deemed to exist. It can affect all the terms of the
contract.
▪ Assumed consensus can be in terms of implied terms or in terms of ticket contract.
Implied terms
▪ In instances where parties failed to agree expressly or tacitly about a term of a contract, courts may
add the term as implied term from the contract.
▪ The court may read the term on condition that or upon the fulfilment of these requirements:
- The inclusion of the term is fair and reasonable(sensible)
- The term must be based on the common intention of the parties.
- The interpretation of the contract must show on the balance of probabilities that the parties
would have included the term if they were aware of their omission.
- The term must promote business efficiency to the contract.
- Must be clear and unambiguous (not capable of two meanings)
- The term must be necessary.

Ticket contracts
❖ These are contracts where a service provider issues a ticket or a document that contains terms and
conditions of the contract.
- E.g. a bus ticket.
❖ Are the terms binding?
- The contracts are binding if the receiver of the ticket knows or ought to have known there is
writing and that the writing referred to the terms and conditions.
- If the receiver answers yes to the questions, the contract is binding.
- If the above requirements are not met, did the issuer of the ticket do what is reasonably
necessary to inform the receiver about the terms and conditions? If no, there is no contract.

The influence of the Consumer Protection Act

➢ Where the supplier is indemnified from liability, the consumer must be notified in clear and catchy
writings.
➢ Where the supplier is indemnified for injury or death of unusual character the consumer must assent
to the indemnification.
➢ Indemnification should fair and reasonable.
➢ The indemnification must not include abuse, false, misleading information.
➢ Failure to comply with this means that the contract is void.

Cancellation or over-booking by the supplier in ticket contracts

o In ticket contracts, receivers have the right to cancel.
o In case of over-booking by the supplier, the receiver of the ticket is entitled to the refund, interest
at the appropriate rate and compensation for loss suffered.
o Defence is that failure was not as a result of the doing of the supplier and the supplier has an
alternative and informed the receiver and acted reasonably (diligent).
Consensus through operation of the law
The parties in the contract need not to reach consensus in terms of the terms that are included by law:
legislation, common law and trade usage.

Common law
The terms included in terms of common law in the contract are known naturalia. These terms may be
excluded by incidentalia.
- Warranty against latent defects is a naturalia.
- Warranty against latent defects forms part of every contract unless excluded by “voetstoots” or
“as is” term.
- Warranty against eviction by third parties is invalid.

Legislation
Certain contracts invite the application of NCA and CPA to promote efficiency of business and protect
the consumers. Legislation may include terms that cannot be excluded in the contract even if parties did
not agree for its inclusion. Consensus will be deemed to exist.

Trade usage
Consensus may be deemed to exist between parties in terms of trade usage e.g. interest paid on sale on
credit. The following requirements must be complied with:
o Be applied universally and uniformly. This means that it applies to everyone in the same
manner.
o Been established over a long period of time.
o Well known in the industry.
o Be sensible and needed or necessary.
o Content specific and determined with certainty.
o Not against any rule.
o Not be against any term in the contract.

The influence of CPA to the contents of contracts.

❖ The CPA has sections that aim to ensure fairness in the supplier-consumer relationship in the
context of contracts.
❖ Suppliers no longer have the unfair advantage that manifested from principles such as the court
cannot look behind the signature of the consumer.
❖ Suppliers should refrain from any form of misrepresentation.
❖ Suppliers must provide adequate information to consumers in writing.
Plain language contract
➢ Contracts should be drafted in plain language.
➢ Terms that excuse the supplier from liability must be written in catchy form of writing.
➢ Failure to comply the court may remove clauses in contract, declare void, or any order that is just
and reasonable.
➢ A contract is plain and understandable if a consumer with minimum literacy skills and consumer
experience is expected to understand it.
➢ The following factors should be taken into consideration:
- Context, detail and consistency of the contract
- Organisation, form and style of the document.
- Vocabulary, usage and structure of the document.
- Use of example or aids of reading.

Unfair, unreasonable and unjust terms of contract

The supplier cannot enter into a contract that is unfair to the consumer or where the consumer is required
to waive their right or where the supplier is excused from liability.

➔ Unfair, unjust and unreasonable terms and conditions:

- One sided in favour of the supplier
- Inequitable to the consumer
- Consumer relied on false, misleading and deceptive representations.

Prohibited transactions, agreement, terms and conditions

▪ Suppliers are prohibited from entering into contracts that aim to defeat the purpose of CPA and to
subject consumers to fraud or misrepresentation.
▪ It is also prohibited if a term or condition directly or indirectly purports to:
→ waive or deprive a consumer of a right;
→ avoid a supplier’s obligations;
→ set aside the effect of any provision of the Consumer Protection Act;
→ authorise a supplier to do anything that is unlawful;
→ authorise a supplier to fail to do anything that is required in terms of the Consumer Protection
Act;
→ limit or exempt a supplier from liability for any loss attributable to his/her gross negligence;
→ constitute an assumption of risk or liability by the consumer;
→ impose an obligation on a consumer to pay for damage to any displayed goods, unless the
damage was unlawfully caused by the consumer;
→ be a negative option marketing offer;
 → be a false acknowledgement by a consumer that no representations or warranties were made in
connection with the agreement by the supplier;
→ be a demand that a consumer forfeit any money to a supplier if he/she exercises any right in
terms of the Consumer Protection Act;
→ be an authorisation for any person acting on behalf of a supplier to enter any premises for the
purposes of taking possession of goods to which the agreement relates;
→ be an undertaking to sign in advance any documentation to enforce the agreement;
→ consent to a predetermined value of costs relating to the enforcement of the agreement;
→ be an undertaking by a consumer to deposit with a supplier an identity document, credit or debit
card, bank account or automatic teller machine access card.
▪ The requirements cannot be avoided and any agreement that seeks to avoid the above is void.

Right to return of goods

o Consumers are entitled to return goods to suppliers with 10 days after delivery and the supplier
must refund the consumer within 15 days after delivery.
o This is where the goods were marketed through direct marketing (writing)
o This is known as the right to ‘rescind or cooling off’.
o With regards to unsafe good or defective goods (failure to meet implied standard) the consumer
may return the goods within 6 months.
o This is on condition that the consumer did not get an opportunity to inspect the goods.
o Here the risk lies with the supplier and may claim costs for use of the goods.

Cancellation of reservation or orders

• The consumer may cancel the order or reservation.
• However, the supplier will have right to reasonable deposit for cancellation.
• The reasonable deposit will depend on the following:
- Nature of the goods
- Cancellation notice
- Potential to find substitute
- Practice of particular industry
• The supplier cannot charge cancellation fee due to hospitalisation of the consumer or death.
• This does not apply to franchise or custom made orders.
Implied warranties
➢ Implied warranty is affirmation and acceptance that goods are of a certain standard or quality.
- It does not apply to goods sold on auction
- Where goods are damaged from the control of the supplier and
- The consumer was informed and accepted.
➢ This is addition to any warranty in terms of common law.
➢ The transaction which includes once off transactions and transactions that excludes once
transactions are catered for.

Implied warranty of good quality labour and repair work.

• The supplier of labour or repair of any repaired part or installation of a new part warrants or affirms
the quality of work for three months after the work or longer if the supplier provides in writing.
• This does not apply if the user has abused or damaged the repaired or the installed part.
• This warranty or affirmation of quality does not apply to wear and tear.

Implied warranty of timely delivery and performance

o The supplier must deliver upon the agreed time or reasonable time if no agreement exists at the
agreed place.
o The place of delivery is the supplier’s business.
o The risk of the goods remains with the supplier until delivered to the consumer.
o Delivery takes place when the consumer communicates that he takes delivery or does anything that
limits the ownership of the supplier.
o Or if the consumer keeps the goods of the supplier for too long without authority indicating that
she does not want.

Implied warranty of authority and quite possession

It is implied affirmation or warranty that the supplier of goods and services has the right to sell, transfer
ownership, lease and the consumer will have the right to enjoy the goods and services.
SU 2.1.3: Consensus and the Time and Place of Conclusion of the Contract

Learning material
Business Law paragraphs 3.97 – 3.110

Learning objectives
After studying this section you should be able to demonstrate your understanding of the role of
consensus when it comes to the time and place of conclusion of the contract (and against the
background of study units 2.1 and 2.2). In particular, you must be able to:
1. Identify and explain the relevance of the time and place of the conclusion of a contract;
2. Explain the theories application to the time and place of the conclusion of a contract making
specific reference to the declaration, expedition, receipt and ascertainment theory. You must be able
to demonstrate your understanding of the general rule that applies in this regard in practice in South
Africa and the exceptions that exist to this general rule;
3. Discuss the rules relating to the interpretation of contracts;
4. Apply the abovementioned principles/law to relevant but unfamiliar scenarios to solve practical
problems.

Introduction: When and Where the contract is concluded

 The place of the conclusion of the contract determines which court has the authority to decide the
dispute with regards to the contract. (Jurisdiction to decide the matter)
 The time of conclusion of the contract is important in answering the question whether the offer
was withdrawn (revoked) before acceptance or not.
 When the contract is concluded by the offeror and offeree at the same place, the contract is
concluded at that particular place and time where they sign the contract together.
 Where they are at different places there might be technicalities as to when and where the contract
was concluded. This study unit deals with technicalities that may arise.
 There are four theories, the rule of practice in South Africa and exceptions to the rule that seek to
provide solutions.

The four theories refer to the four stages of acceptance.

These theories indicate when and where the contract is concluded.
❖ Declaration theory: When and where the offeree makes declaration of acceptance of the contract.
(Signature) (this is not applicable in our law)
❖ Expedition theory: When and where the declaration of acceptance of the offer is sent to the
offeror.
❖ Reception theory: When and where the declaration of acceptance of the offer made by the offeree
is received by the offeror.
❖ Information theory: When and where the offeror gains knowledge of the acceptance of the offer
by the offeree.
General rule of South African practice
In South Africa information theory is applicable.
 This means that the contract is concluded when and where the offeror gains knowledge about
the offeree’s acceptance of the contract.
 The actual time and place where the offeror gains knowledge of the acceptance of the offer by
the offeree are extremely important.
 They determine when and where the contract is concluded.
 A, the offeree sends his messenger B to take the accepted contract to C the offeror in Cape
Town. B deliverers the contract to C on the 10 of April 21 and C sees that the contract is signed
by A. The contract is concluded on the 10 of April 21 at Cape Town.

Exceptions to the general rule

➢ Where offer and acceptance are both delivered by old fashioned methods such as post,
telegram or phonogram, the expedition theory will apply.
o The contract is concluded when and where the offeree’s acceptance of the contract is sent to
the offeror.
o In other words, when the offeree sends the signed contract by post on the 11 of April 21 at
Pretoria Post office, this means that the contract is concluded on the 11 of April 21 at Pretoria.
o However, the following prerequisites must be complied with:
- Both offer and acceptance are made by post
- The offeror does not require another form or method of acceptance.
- The general postal services must be operational
- The letter of acceptance must bear the correct address
o N:B The place and time where acceptance is posted determine the place and time of the
conclusion of the contract. Do not be confused by the place and time when the offer is posted
to the offeree.
o This is known as ascertainment theory and is applied for efficiency and to promote certainty.
➢ Where only the acceptance is sent by data messaging: e.g. email, website, sms, text messages,
whatsapp, or interactive tv.
o The Electronic Communications and Transactions Act 25 of 2002 (‘ECT Act’) provides that
the contract is concluded when the message containing acceptance reaches the information
system of the offeror and can be accessed and used.
o Whether the offeror gains knowledge of acceptance is not relevant.
o The contract is concluded where and when the message is received in the system of the offeror.
o Whatsapp two ticks not blue ticks.
 o In terms of this Act the contract is concluded at the place of business or residence of the offeror
not where she is.
➢ Where fax, telefax or telephone are used to send acceptance and where different methods to
send offer and acceptance are used, information theory will be applied.
o This means that the contract will be concluded when and where the offeror gains knowledge of
acceptance.

Interpretation of contracts
❖ It is inevitable that there would in certain contracts lack of clarity with regards to the intentions of
the offerors and offerees.
❖ And the fact that declaration of intent can also be communicated by conduct, assumed
(assumptions) and by operation of the law makes matters worse.
❖ Thus, rule of construction to determine the contents of contracts have been developed and they are:
- The intentions of the parties must be determined from words, conduct or symbols used by
parties.
- The contract must be interpreted in its entirety.
- Every word or symbol must be understood in terms of its ordinary and grammatical meaning.
- Unclear (ambiguous words) must be interpreted in line with the nature and content of the
contract.
- Unclear/ambiguous words must have the effect of keeping the contract valid not null and void.
- Unclear words must be interpreted in manner that does not unduly favour the party who used
them in the contract. (the person who used the words in the contract must receive the slightest
advantage from the words) not excessive advantage).
- Meaningless words must be disregarded and when they are important in the validity of the
contract, then the contract is void ab initio.
SU 2.1.4: Factors that influence Consensus

Learning material
1. Business Law paragraphs 3.111 – 3.130 and 3.132 – 3.133 (exclude par 3.131)

Learning objectives
After studying this section you should be able to demonstrate your understanding of the factors that
influence consensus (and against the background of study units 2.1.1 – 2.1.3). In particular, you must
be able to:
1. Explain and differentiate between the factors that influence consensus, specifically regarding
1.1. Error
1.1.1. define error;
1.1.2. define and discuss the different forms of error;
1.1.3. distinguish the forms of error from each other;
1.1.4. discuss and distinguish the effects of the different forms of error on the contract;
1.2. Misrepresentation
1.2.1. define misrepresentation;
1.2.2. define and discuss the different forms of misrepresentation;
1.2.3. distinguish the forms of misrepresentation from each other;
1.2.4. discuss and distinguish the effects of the different forms of misrepresentation on the
contract;
1.2.5. discuss and distinguish between the remedies for misrepresentation;
1.3. Duress
1.3.1. define duress;
1.3.2. discuss the requirements for duress to affect the validity of a contract;
1.3.3. against the background of the requirements for duress, discuss and distinguish the
impact of the different effects of duress on the contract;
1.4. Undue influence
1.4.1. define undue influence;
1.4.2. explain the requirements for undue influence to affect a contract;

1.4.3. explain the effect of undue influence on a contract;

2. Differentiate between error, misrepresentation, duress, undue influence and commercial bribery;
3. Differentiate between the effects of error, misrepresentation, duress, undue influence and
commercial bribery on the validity of the contract;
4. Explain, discuss and analyse the impact of the Consumer Protection Act on factors that influence
consensus of a contract;
5. Apply the abovementioned principles/law to relevant but unfamiliar scenarios to solve practical
problems.
Introduction
There are instances where it would seem or appear that parties in the contract have reached consensus
whereas this is not case because of the presence of some factors.

In some cases the contract will be null and void (no contract) and in some cases it would be voidable
by the party who would suffer damage or prejudice because of the contract (contract exists but
voidable).

Factors
Error
➢ Error in the form of mistake renders the contract null and void and misrepresentation, duress, undue
influence and commercial bribery renders the contract voidable.
➢ Error is a false/incorrect impression about facts, events and circumstances.
➢ Errors can be distinguished into two forms:
- Error in motive is false/incorrect impression or to err about why one is concluding the contract.
- Error or false impression or to err about the existence and the content of the contract. (error
about the existence and contents of offer and the acceptance)
➢ N:B Generally for A to challenge the validity (to say there no contract) of a contract she concluded
with B on the ground of mistake or error. A should prove that the error/mistake was reasonable
(not due to carelessness/recklessness) and the error was substantial (not trivial).

Error in motive
• Error in motive is an error or false impression about the reason why one is entering into a contract.
• E.g. Bettie buys a new motor bike from Suzan because she is under the impression that her motor
bike is beyond repair.
- The error in motive does not affect the validity of the contract.
- The contract is valid.
- However, where Susan who serves as a mechanic misrepresents that Bettie’s bike is beyond
repair, and Bettie buys the new bike because of the misrepresentation.
- The error will affect the validity of the contract.
- The contract will be voidable due to misrepresentation not error in motive.
- This means that Bettie can set the contract aside.
• N:B Error in motive does not affect the validity of the contract.
Error regarding the existence and contents of the contract
▪ Error regarding the person or party in the contract This is where A intends to conclude a contract
with B a golf coach to provide golf lessons and ends up concluding the contract with C a soccer
coach whom he thinks is B. This contract is null and void.
▪ Error with regard to the identity of the other party in contract Sam concludes an employment
contract with Tim and he wants to conclude the contract with Tim. However, Sam is under the
impression that Tim’s name is Vincent. The contract is valid as the error is just about the
name/identity) not the actual person.
▪ Error in the nature of the contract Vusi wants to lease Percy’s house and Percy is under the
impression that they are concluding a contract of sale. Here there is no contract. (null and void)
▪ Error with regards to the performance
- Sam concludes a contract to buy Tim’s car which is a V6 and Tim delivers a car which is a V5
to Sam. Sam is under the impression that it is a V6. The contract is null and void.
▪ Contracts concluded where one party is under the impression that the other is giving warranty or
guarantee (no latent defects) only to find that this is not the case.
▪ Contracts will be invalid.
▪ Facts of each case will determine the type of error in the contract.

Disputes of contracts on the grounds of error

❖ In the case of dispute the following must be present/proved
 The party who alleges that the contract is valid must prove that the declarations of intent are
the same and correspond. In other words, there is agreement or contract.
 The party who alleges that the contract is invalid or void must prove that the declarations of
intent due to the reasonable and substantial mistake do not contain his actual will in the contract.
❖ Error is reasonable (affect the validity of contract) when:
- There are objective facts that make the mistake/error excusable/justifiable in the eyes of the law
- Error was as a result of wrongful misrepresentation by the other party in the contract. (fault not
required)
- The party transgressed or failed in her legal duty to speak.
❖ Where the party wishing to challenge the validity of the contract was negligent (unreasonable) the
contract will be valid even though the error was material.
❖ Where error is successfully showed to be reasonable and material and thereby rendering the
contract invalid, the contract will be void.
❖ Performances rendered will be claim based on other juristic or legal facts such as unjustified
enrichment.
❖ Reasonable reliance as a basis of the contract
- Where it is proven that the was error and the other party acknowledges this but was reasonably made to
be believe that there were corresponding declarations of intent by the other party.
- The court may rule that the contract is valid based on the fact that the party was reasonably made to
believe (rely) that there was consensus by the other party.
- This reasonable reliance is known as secondary basis of contract.

Misrepresentation
➔ Misrepresentation is a false statement of fact made in writing or spoken (expressly) or by
conduct(tacitly) which makes (induces) the innocent party to conclude a contract.
- Fraudulent misrepresentation: made deliberately
- Negligent: made negligently (fails to act in manner that a reasonable person would in the circumstances-
careless)-acting carelessly.
- Innocent: made without fault (neither deliberately nor carelessly)
➔ In all the aforementioned circumstances the contract will be voidable not void.
➔ However, in fraudulent and negligent misrepresentation, the party who suffered damages may
claim them in terms of Delict.
➔ In innocent misrepresentation damages may only be claimed in contracts of sale and exchange.
➔ In case where the price paid is higher than the actual value of the item, the price may be reduce.
➔ Where the actual value of the item is still higher than the actual price paid, then there will be no
reduction.

Duress (coercion or threat)

 One party to the contract may conclude a contract because she is threatened or her relatives or
property may be threatened and due to the threat may lose her capacity to form a will. This is
known vis obsoluta.
 The contract is null and void because of the temporary lack of contractual capacity.
 In some cases the party may still have the capacity to form a will but may be forced to conclude
the contract to avoid potential danger. This is known as vis compulsiva.
 Here the consensus is received through unacceptable means.
 The contract is voidable.
 For contract to be voidable based on the vis compulsive the following must be present: This is
where the threatened party still has contractual capacity.
- There must be violence and reasonable fear.
- The fear must be caused by the threat to the party or his family.
- The threat must forthcoming or unavoidable.
- The treat must be corrupt.
- The pressure must cause damage.
Undue influence
o Where the other party is unduly influenced to conclude a contract she would not under normal
circumstances conclude.
o In other words, where one is improperly swayed to conclude a contract that she would not normally
conclude.
o Where one’s will is weakened and made to conclude a contract she would not normally conclude
under normal circumstances.
o D who is extremely ill and not able to form a will or intention is made to sell his farm at ridiculously
low price to C his brother.
o The contract is valid but voidable.
o The contract on this ground can be set aside when:
- One party improperly swayed the other party.
- The influence must have made the other party’s will weak and led him to conclude the contract.
- The other party must have used his influence improperly.
- The influence must have led to the conclusion of the contract.
- The contract must have led to damage of the influenced party.

Commercial bribery
▪ Commercial bribery contracts are void.
▪ Where A the principal instructs B his agent to go negotiate a contract of lease with C. C pays B
money to agree to inflate the price of the lease. The contract between C and B is void and the
contract between A and C is valid but voidable at the wishes of A. This is because of bribery.

Right to fair and honest dealing

➢ Consumer Protection Act 68 of 2008 if applicable the common law principles discussed above are
acknowledged and extended in the following manner:
- Any conduct that is contrary to the policy and purpose of the Act is prohibited.
- Any conduct that is improper and fraudulent is prohibited. (force, duress, undue influence,
exploiting of consumers)
- Any conduct that amounts to misrepresentation of supplier, goods and services is prohibited.
➢ Any conduct that amounts to fraudulent marketing is prohibited. Any act that negates the above is
void.
SU 2.2: Contractual Capacity as a Requirement for the Formation of the Contract

Learning material
1. Business Law paragraphs 3.134 – 3.182

Learning objectives
After studying this section you should be able to demonstrate your understanding of contractual
capacity as one of the general requirements for a valid contract. You must be able to:
1. In respect of "legal capacity:
1.1. Explain what "legal" capacity is;
1.2. Discuss the categories of legal subjects;
1.3. Distinguish between natural and juristic persons;
1.4. Explain the meaning of, and difference between, ultra vires and intra vires conduct;
2. In respect of "contractual capacity":
2.1. Explain what "contractual" capacity is;
2.2. Name the elements that constitute contractual capacity;
2.3. Explain the categories in which persons can be classified according to their contractual
capacities;
2.4. With reference to learning outcome 3 of this study unit, discuss and differentiate between the
classification of the persons specifically referred to (eg infans, minor, etc.);
3. Analyse, explain and discuss the contractual capacity, and related matters, of the following persons:
3.1. An infans, including
3.1.1. the definition of "an infans";
3.1.2. acts that may be performed on behalf of an infans; and
3.1.3. the legal consequences thereof;
3.2. Mentally incapacitated persons, including
3.2.1. the onus of proof regarding mental incapacity;
3.2.2. which acts can be legally performed by mentally incapacitated persons without any
assistance;
3.2.3. which acts may be performed on behalf of a mentally incapacitated person;
3.2.4. which persons are entitled to act on behalf of mentally incapacitated persons;
3.2.5. the legal consequences thereof; and
3.2.6. the effect of the Consumer Protection Act on contracts with mentally unfit persons;
3.3. Persons under the influence of alcohol or drugs, including
3.3.1. the onus of proof regarding intoxication and incapacity; and
3.3.2. the legal consequences of a contract concluded while a person is under such influence;
3.4. Minors, including
3.4.1. the definition of "a minor" and a "guardian";
3.4.2. how majority status may be attained;
3.4.3. who may act for or on behalf of a minor;
3.4.4. distinguishing those cases where a minor is bound by contract from cases where a minor
is not bound by contract;
3.4.5. contracts or acts, and the legal requirements or consequences thereof, on minors when:
3.4.5.1. a minor acts independently;
3.4.5.2. a minor acts with assistance or permission;
3.4.5.3. a guardian acts on behalf of a minor;
3.4.5.4. additional authority is required over and above the consent of a guardian;
3.4.5.5. a minor is an emancipated minor;
3.4.5.6. a minor fraudulently represents that he is a major; and
3.4.5.7. prohibited contracts are entered into by or on behalf of a minor;
3.4.6. the effect of the Consumer Protection Act on contracts where the consumer is a minor;
 3.5. Married persons (or persons in formally recognised unions or civil marriages), including
3.5.1. the different patrimonial bases on which a marriage can be concluded;
3.5.2. the legal position of married women married in community of property before 1
November 1984 and contracts that may be concluded by such women without the assistance of
their spouses;
3.5.3. the legal position of women married in community of property after 1 November 1984
and indicate which forms of consent are required;
3.5.4. differentiating between 3.5.3. and 3.5.4;
3.5.5. the extent to which spouses married in community of property after 1 November 1984 are
liable for debts;
3.5.6. the legal consequences of marriage which may be excluded by an antenuptial contract;
3.5.7. marriage entered into after 1 November 1984 specifically with reference to the effect of
the accrual system;
3.5.8. how an existing matrimonial property regime may be changed;
3.6. Prodigals, persons under curatorship and insolvents;
4. Apply the abovementioned principles/law to relevant but unfamiliar scenarios to solve practical
problems.

Introduction: Contractual capacity

❖ The capacity to conclude a contract is known as the contractual capacity and it has two
components:
- Ability to form an intention or will (ability to intend to do something)
- Ability to act with sound mind towards that will or intention
❖ Persons also known as legal subjects are the holders or bearers of rights and duties.
❖ Legal subjects or persons have legal capacity from birth to death.
❖ We have natural persons and juristic persons (entities such as companies, Universities).
❖ All human beings are natural persons and have legal capacity.
❖ However, circumstances such as age, gender and legal consequences (marriage and insolvency)
may affect their status.
❖ The status of the person affects or determines her contractual capacity.
❖ Natural persons can be classified into three categories:
- Persons with no contractual capacity,
- With limited capacity and
- With complete capacity.

Legal or juristic persons

➢ The law also grants legal/juristic personality to entities such as Universities, societies and
Corporations such Eskom SOC.
➢ These are bearers of rights and duties and have contractual capacity.
➢ However, partnerships and joint ventures are not separate juristic persons. However, as in terms of
Consumer Protection Act (‘CPA’) partnerships, body corporates and trusts are separate juristic
persons. Note this is for the purposes of the application of the CPA.
Intra vires and ultra vires actions
 Legal/juristic persons are established with specific aims/objective. E.g. to transport people and
goods through the air. (flight company like SAA).
 They must conclude acts that are intra vires or in line with their objectives (scope). These acts are
valid.
 Acts that are outside or not in line with their objectives are said to be ultra vires and invalid. (or in
Companies they may be valid but prohibited and this means that entities may claim damages from
directors or controlling minds for acting ultra vires.
 Since they are artificial persons they need natural persons to act on their behalf. These are known
as organs. E.g. in companies directors act as organs.

Persons without contractual capacity

Persons who are below the age of 7
o A person who is below the age of 7 is an infant and has legal capacity but does not have contractual
capacity.
o Her or his guardian can manage his or her estate or issues pertaining to his maintenance or support.
o Guardian cannot enter into engagement contract on behalf of the infant.
o From 7th birthday the child graduates to the status of a minor and his contractual capacity is limited.

Mental care users

▪ All have sound mind until proven otherwise.
▪ Any person alleging unsound mind and incapacity must prove that.
▪ When one is alleging that a person who is a Mental Health Care User had contractual capacity must
prove that.
▪ Not all persons will mental limitations are classified as mental health care user or of unsound mind.
Some are born with limitations and some get them while they are growing up.
▪ The mental limitations hinder them from being able to form a will or intention and act with sound mind
towards that will.
▪ Thus, they lack contractual capacity.
▪ Contracts with people who lack contractual capacity are null and void.
▪ Facts of each case will determine whether a person had contractual capacity or not.
▪ CPA prevents contracts with persons who lack contractual capacity where the supplier knew or ought
to have known that consumer lacked contractual capacity.
▪ However, CPA does not apply where the consumer or person acting on his or her behalf misrepresented
that the consumer had contractual capacity whereas this is not case.
▪ Mental Health care users or persons with no contractual capacity can conclude contracts by the
assistance of administrators or curators.
Persons under the influence of alcohol or drugs
• A person who is under the influence of drugs or alcohol has no contractual capacity as long as he is still
in the state of intoxication.
• Thus, he cannot form a will and act with sound mind towards that will.
• He cannot understand and appreciate the consequences of his actions.
• Contracts are null and void and party who has performed may claim return of goods and when
impossible may claim in terms of unjustified enrichment (enrichment without basis).
• However, when he still has contractual capacity while intoxicated, the contracts are valid.
• Person who claims contractual incapacity due to intoxication must prove.

Persons with limited contractual capacity

Minors 7 years or older but not yet 18.
➢ Minors can conclude contracts with the help of the others and help is meant to aid the limited contractual
capacity. (Guardians or tutors) Minors can gain the age of majority in three ways:
- Attaining 18
- Marriage
- Order of court
➢ The help or assistance is from the guardians who are both natural parents and adoptive parents.
➢ Where they are deceased the Court or Master of High Court or last will, will appoint the tutor to assist
the minor.
➢ Official letters should be issued by the Master before tutor can act.
➢ Some contracts will require the consent of guardian or tutor for the minor to be bound.

Contracts binding on minors

• Where minor has full contractual capacity(advantage)
- The consent of the parent or guardian is not necessary where minor acquires rights without duties
(donation), where making some transactions in the Bank and consenting to some medical
procedures.
- The key here is that the contract must be to the advantage of the minor.
• Where minor acts with the help of the guardian
- Some contracts require the assistance of the parent or guardian.eg Purchase and sale.
- The guardian can give consent before, during and after the conclusion of the contract.
- Where given after the conclusion of the contract it is ratification. (Making the act valid and binding)
- The minor can also ratify some contracts concluded with help of the parent or guardian after
attaining 18.
• Where guardian acts on behalf of the minor
- Here the guardian may act on behalf of the minor in transactions that are to the benefit of the minor.
- If detrimental to the minor then the court may intervene and revert the minor to the situation before
the conclusion of the contract.
• Where additional consent is required
- Where immovable property of a minor worth below R250 000 the consent of the Master is required.
- Where exceeds R250 000 consent of the High Court is required through an application.
• Certain acts are prohibited such as engagement on behalf of the minor.
• Emancipation of a minor
- This is where the guardian grants a general/blanket consent
- The minor must be financially independent.
- This emancipation has the effect of granting contractual capacity to the minor.
- In some instances emancipation is prohibited.
• Where minor falsely creates an impression that she is a major, she will be bound by the contract
and there is no restitution.
- Minor will always be entitled to restitution(giving back what he lost) if the contract is to his
detriment except where:
o He falsely created an impression that he is a major
o He accepted as valid and binding the contract(ratify)
o The action has prescribed (time within which to file action has lapsed).
- If the court orders restitution to the minor, the minor will be liable to compensate the supplier for
use of the goods of contract.

Contracts not binding to minors

1st situation
 Where the guardian acts on his own behalf not the minor
 Where the guardian acts outside his or her scope.
 Where the guardian acts without the consent from Master or the High Court

2nd situation
Where the minor acts as the guardians/tutor representative and the latter acquires rights and duties from the
minor’s action.

3rd situation
• Where the minor acted without consent of the guardian.
• The minor will not be liable unless the guardian ratifies and or minor ratifies after attaining 18.
• If so, then minor will be held liable for his duties in the contract.
• Position of the parties in the third situation:
 Where no performance has been made by the either party then performance from the minor cannot
be claimed. Minor can claim from the other party after ratification
 Where minor has performed, the performance can be claimed from the other party provided there is
no ratification.
 Where the other party has performed in full, the minor cannot be coerced to perform when there is
no ratification. When the value of the goods has diminished/destroyed then the other party can claim
from minor in terms of unjustified enrichment provided:
- The minor’s estate is enriched
- The minor can be held liable for the savings his estate made due to enrichment.
- Where minor opted for something else other than the performance then the substitution will be
claimed from the minor
- The minor can be held liable for intentional damage caused to the property of the other party.

Where CPA is applicable and the consumer is minor.

➔ Where the minor concludes a contract with the supplier while the minor is not emancipated, without
consent of the guardian, where the guardian does not ratify and the minor does not ratify when reaching
18, the contract is null and void.
➔ Where the minor or the guardian have falsely created an impression that the minor has contractual
capacity or dishonestly concealed that he has contractual capacity, the minor forfeits the right to render
the contract null and void.

Married persons
Types of marriages:

▪ We have marriages in community of property and out of community of property. (Marriage Act of
1961)
▪ We have civil unions (Civil union Act of 2006)
▪ We also have customary marriages (Recognition of Customary Marriages Act 1988)
▪ We also have religious marriages.
▪ Marriages out of community of property parties must conclude (ANC)
- Ante nuptial contract (‘ANC’) must be in writing, signed, be sealed by a notary and filed at the
deeds registry.

Women married before 1 Nov 1984

In community of property: Acts carried out Before 1 Dec 1993

o Husband was in control of estate and wives treated as minors.
o Husband could bind and dispose the estate.
o Wives were not allowed to bind the estate without consent of husbands except with regards to certain
exceptions:
- Where estate obtains rights without duties
- Where court has granted consent
- Purchase of household goods where there a family lives together
- Wife in business as a trader (certain transactions were allowed)
- In certain contracts where wife receives money or salary.
o Ratification (accept as binding and valid) by husband is possible and will make the acts to be binding
and valid.
o When wife acted without consent, the estate was not bound but the other party was bound.
o The estate only bound when the husband ratifies.
o If the other party has performed can claim in terms of enrichment.

Marriages in community of property before 1 Nov 1984 with acts carried out after 1 Dec 1993
Husband and wife have equal powers.

Marriage out of community of property before 1 Nov 1984

• Three things could be excluded by (ANC) in marriages out of community of property concluded before
1 Nov 1984.
- Community of property
- Profit and loss
- Husbands power
• When excluding community of property means that you have the two separate estates of both spouses
before marriage and one joint estate with gains and losses from the date of marriage onwards. Before 1
Dec1993 all these were control by husbands.
• When excluding community of property and profit and loss. You have only two separate estates of both
spouses. And before 1 Dec 1993, they were controlled by the husband.
• When excluding all three you have two separate estates and each party has contractual capacity with
respect to their own estate.

Married after 1 Nov 1984

In community of property.
❖ Both parties have equal powers.
❖ Consent of both parties is required before concluding certain contracts:
❖ Three types of consent:
- Consent with no formalities given expressly or by conduct (e.g. buying furniture)
- Written consent (e.g. for transfer of shares)
- Written consent with two witnesses (e.g. for sale of an immovable)
❖ Ratification is possible where it is not required by law.
❖ Contracts without consent from the other spouse
❖ Where consent is not given the contract is invalid.
❖ But where the other party in the contract did not know or could not easily know that consent is required,
the contract will be valid.
❖ Upon divorce or death, the estate of the party who concluded a contract without consent is liable to
compensate the estate of the other party for debts incurred because of those contracts.
❖ Defending of actions
- Consent is needed to defend an action and spouses must be sued jointly.
- Unless in their respective separate estates, business or profession.
❖ Contributions to household
- Spouses must contribute in accordance with their financial circumstances.
- Where one is contributing more may claim from the other spouse.
- Spouses are liable jointly and severally for household goods.
- Consent is required to defend action but third parties cannot use absence of consent to nullify
proceedings.

Marriage out of community of property

 Marriage out of community of property you have two separate estates, parties have contractual capacity.
 Accrual system must be excluded or it will be applicable.
 If applicable what accrues to the two estates is shared equally upon divorce or death.
 Accrual –increase in the estate of the spouses, if no increase then there is no accrual.
 And donations to one another excluded and donation by others which are specifically excluded will
also be deducted.
- A Initial net R30 000 and final net R70 000
- B Initial net R30 000 and final net R80 000
- A made donation of R10 000 to B
- And B’S father made a donation of R20 000 to be B and excluded it from accrual.
 Calculate accrual
- A R70 000 –R 30 000 = R40 000
- B R80 000 – 30 000-10 000-20 000=R 20 000
- A accrual –B accrual: R40 000 – R20 000 =20 000
- B is entitled to half of R 20 000
- B receives R 10 000
- A receives R 10 000
 The court may change the matrimonial regime of marriage on application.
 However, valid reasons must be furnished and timeous notice to creditors must be given to all creditors.
Other persons with limited contractual capacity
Prodigals
 A prodigal is person who has the habit of wasting his estate or who cannot manage his affairs.
 The court can declare a person a prodigal.
 A curator will be appointed and will assist such a person.
 Consent of the curator is needed before the prodigal bind his or her estate.
 Contracts where the prodigal’s estate gains rights, consent is not required.
 The prodigal status can only be removed by another court order.

Persons under curatorship or administration

 Person who cannot manage his affairs due to illness or accident can be assisted by a curator.
 Curatorship appointment does not affect the contractual capacity of the person.

Insolvent person
 When a person is insolvent (liabilities exceed assets and not being able to pay debts as they fall due)
the person will be sequestrated.
 Before the order of sequestration the person cannot dispose assets without value or treat creditors
unequally. Such is null and void.
 After sequestration order, the trustee will gather all the assets of the insolvent and convert them to cash
and distribute among creditors.
 Property gained after sequestration can be disposed by the insolvent.
 Insolvent can marry during insolvency after sequestration.

Persons with full contractual capacity but limited due to legal requirements.
e.g. Persons who have been convicted of crime involving dishonesty are disqualified from being appointed
as directors.
SU 2.3: Legality as a Requirement for the Formation of the Contract

Learning material

1. Business Law paragraphs 3.183 – 3.204

Learning objectives

After studying this section you should be able to demonstrate your understanding of legality as one of
the general requirements for a valid contract. You must be able to:

1. Define and discuss legality (juridical possibility of) performance;

2. Explain whether, and if so why, legal possibility or performance relates to the conclusion, object
and performance of the contract;
3. Discuss contracts that are illegal due to the following reasons in detail including
3.1 Explaining the grounds, reasons or requirements for illegality in respect of each category of
illegal contract;
3.2 The consequences of the conclusion of each category of illegal contract; and
3.3 Differentiating between the various categories of illegal contracts and their respective
consequences;
3.3.1 Contravention of legislation;
3.3.2 Prohibited by common law;
3.3.3 Contracts that are against the public morals;
3.3.4 Contracts that are against the public interest;
3.3.5 Restraint of trade clauses;
3.3.6 Wagers and lotteries;
4. Explain the par delictum-rule in the context of illegal contracts;
5. Explain the ex turpi causa-maxim in the context of illegal contracts;
6. Apply the abovementioned principles/law to relevant but unfamiliar scenarios to solve practical
problems.

Introduction
❖ We are now dealing with the third general requirement of concluding a valid contract.
❖ Before a contract can be concluded, the conclusion of the contract and the contents must not break
(not be against) the law.
- In other words, the contents of the contract must not be against the law which is Legislation, Common
law, and public morals (what the public view as morally acceptable).
❖ The performance must also not break the law. And performance must realisable and certain.
- This is the fourth requirement, we will deal with it in the next study unit.

Legality
 The general rule is that the conclusion of the contract must not break the law.
 A contract will break the law if it goes against what is provided in legislation, common law and
public morals.
 It some instances it will be the nature, or the purpose or the performance of the contract that breaks
the law.
How the nature, purpose and performance of contract break the law
➔ Nature of the contract that breaks the law (Legislation)
- Nagel et al gives good examples. Think of other examples. e.g Section 2(1) of the Counterfeit Goods Act
31 of 1997 prohibits the sale, exchange, and hiring of counterfeit goods. The section also provides that
it is an offence to engage in such contracts.
➔ Purpose or objective or aim of the contract that breaks the law
- e.g Loan granted to start an illegal mining venture. Here the purpose of the loan is to start an illegal mine.
This clearly breaks the law.
➔ Performance that breaks the law
- e.g Sam concludes a contract with Tim. In terms of the contract, Sam undertakes to pay R50 000 to Tim
in order for Tim to attack and badly assault Jack who is Sam’s enemy. Here Tim’s performance is
breaking the law.

Contracts that break legislation

• E.g. As aforementioned, section 2(1) of the Counterfeit Goods Act 31 of 1997 prohibits the sale,
exchange, and hiring of counterfeit goods. The section also provides that it is an offence to engage
in such contracts.
• Here is an example that deals with an application of the section 2(1) of the Counterfeit Goods Act:
- Tim manufactures counterfeit sneakers in his factory. He then sells the sneakers to Fred who is in the
business of selling sneakers. Tim is committing an offence by selling the counterfeit goods and the
contract between Tim and Fred is null and void as it amounts to breaking the law. In some of instances
the law will prohibit the contract, provide that it is null and void and also provide that parties commit an
offence.

Examples of contracts the break common law

These are contracts that are against public interest or good morals of the society.

Good morals
This is a contract that transgresses the good conscience of the community. So a contract will be against
good morals if it transgresses what the community views as good and acceptable. E.g. Sam pays Cindy
to continue to have an extra marital relationship with him. The book is also giving good examples.
Think of other examples.

Public interest
This is a contract that transgresses the public interest or any area that affects the public such as the
administration of justice e.g. Sam pays the investigating officer not to investigate a case of murder, rape
or corruption.
Examples of contracts that break (not in line) public interest.
 Contracts that are unreasonable and concluded in bad faith (lacking good faith or bona fide)
 e.g Jane concludes a contract with Government to transport children to school in one of the villages in the
Eastern Cape. Jane charges two times the normal price to transport children. On the basis of Ubuntu, courts
may declare the contract unreasonable and concluded in bad faith because it does not serve the society. The
basis may be the fact that the contract is unreasonably expensive to Government and involves dishonesty
from Jane.

Contracts that involve limitations of rights

• Contracts limit rights of individuals who conclude them.
• E.g when you are a brick layer hired to build a house; you will be required to spend time building
the house and this amounts to the limitation of rights. However, limitation of rights that is against
public policy or the law is invalid. The book gives good examples. Please look at the examples.
This means that limitations of rights are acceptable but when against public policy or the law then
they are invalid.
- E.g. A taking B by force to go work at his construction company is against the law and thus the contract
of this nature is invalid.

Restraint of trade
→ Restraint of trade is a principle that limits the right to freedom trade.
→ It is acceptable if it in line with the law or public interest.
→ e.g Sam a good manufacture of TV sets owns a company in Pretoria. He decides to sell the company
to Jack. In addition they agree that Sam cannot start the same business in competition with the
purchaser within a radius of 100 km.
→ This seeks to promote the business interests of the new owner and it is also in the public interest
for Sam to adhere to the requirements of the contract. Here Sam is prevented from using the
business information to compete with Jack’s business. You will realise that Sam has benefited from
such information when he sells the company.
→ The restraint of trade must be in line with public policy. Circumstances of each case will determine
whether the restraint of trade is against the public policy.
→ Restraint of trade will be declared wholly or partly invalid if the party who is prevented to act can
prove that it is damaging to the public interest. In other words, it is unreasonable.
→ E.g When it is so overreaching that it totally takes Sam out of business such that he is not able to
have a livelihood.
→ The court will take into consideration the following factors:
o The act prevented and the interest protected
o The scope of time and space.
o Whether parties negotiated from a levelled playing field.
Gambling and lotteries circumstances or contracts
 In the past in terms of common law, gambling and lotteries were prohibited but now they are
allowed under strict conditions in terms of the relevant legislations.
- e.g. In a Wager where Ben undertakes to pay Ann if Manchester United defeats Barcelona. This
is a wager and is unenforceable in court but recognisable. It is also against public interest. This
may create problems. See the examples of the problems in paragraph 3.201.
 Note here that:
▪ Wagers are generally not enforceable.
▪ Gives rise to natural obligation (cannot be enforced in legal proceedings).
▪ But payment made to the winning party cannot be reclaimed.
▪ Loans concluded with a participating party to continue/gamble to play are not enforceable.
▪ A contract of mandate related to a wager is enforceable provided the mandate is fulfilled and
bet money is paid.
▪ When a mandate is given and includes that the party who is sent to play should use his own
money, then the sent party can claim from the party who sent him if he loses the bet.
▪ Where parties play and one borrows money from the other party during the game, then contract
is not enforceable. However any loan after the game is enforceable. And any loan from a non-
participating party is enforceable.
▪ Wagers have the potential of creating complex problems.

Effect of illegality
Ex turpi causa
➢ Ex turpi causa rule which means that “no valid actions can come from illegal contracts” means
that it is impossible to claim from an illegal contract
➢ Contracts are null and void
➢ Normal contractual remedies are not available to parties
➢ Delivered performance can be reclaimed on the grounds of unjust enrichment (unless par
delictum rule applies)
➢ e.g. A concludes a contract with B to pay B to continue to have an adulterous relationship with A.
Performance is impossible here as the contract is against public morals and invalid. But if A has
performed he can claim what he performed in terms of unjustified enrichment.

Par Delictum rule

 But where A and B are not equally blameable in the contract, the right of the possessor of
performance is favoured. Where A is to be blamed more than B.
 This is known as par delictum (where one is more at fault for the conclusion of the contract than
the other party). This means that B can be allowed to possess the performance.
 However, despite par delictum, the court may decide to order the return of performance in the
public interest or where it seeks to create peace. This means that in some cases B may be ordered
to return the money to A.
SU 2.4: Physical Possibility as a Requirement for the Formation of the Contract

Learning material

1. Business Law paragraphs 3.206 – 3.211

Learning objectives

After studying this section you should be able to demonstrate your understanding of physical possibility
as one of the general requirements for a valid contract. You must be able to:

1. Define and discuss physical possibility of performance;

2. Explain the meaning of, and requirements for, and differences between impossibility regarding
performance with reference to objective, absolute and subjective impossibility of performance;
3. Explain the meaning of, and requirements for, and differences between performance being
determined or determinable;
4. Apply the abovementioned principles/law to relevant but unfamiliar scenarios to solve practical
problems.

Physical possibility as a requirement for formation of a contract

➔ For a contract to be valid performance must be possible and certain.
- Let use an example to explain this:
• Sam offers his sports car to Jim for R200 000 and Jim accepts the offer. While Sam and Jim are
busy negotiating, Sam’s property catches fire and the car in the garage is completely destroyed
without Sam and Jim knowing.
• Here the contract is invalid as it is impossible for Sam to perform. It is not just impossible to Sam
only but impossible for everybody to perform in Sam’s position.
• This is known objective impossibility.
- For a person to escape liability the impossibility must be objective. (reasonably impossible to
perform for everybody).
• However, where in the contract Sam guarantees or promises that the car is safe, then Sam will be
in breach of contract and will liable for damages.
• Where Sam offers to sell Gen’s car to Don and Gen refuses to sell to Sam, then impossibility is
subjective. Only Sam is unable to perform.
• This is subjective impossibility – no effect on the validity of the contract; usually results in breach
of contract.
• The contract is valid and Sam will be liable for damages as his actions amounts to breach of contract.
- Impossibility is absolute when it is completely impossible to perform as provided in the first
example where Sam’s property catches fire and the car in the garage is completely destroyed.
- And not absolute when it possible to perform but performance makes no economic sense or
where it will be far reaching to the person who should perform. Where Sam offers to sell his
car to Vusi and Sam’s house catches fire and partially destroyed.
Performance must be certain (determined or determinable)
➢ Where the agreement of the parties of the contract is such that performance is uncertain, meaning
that you cannot tell what each party’s rights and duties are, then the contract is null and void due
to uncertainty (void for vagueness). In other words, where you cannot determine the performance
that is expected from each party.
➢ e.g Anna an owner of a shop offers to sell Sam any item in the Shop for any amount of money.
Here the contract is invalid as rights and duties of either party are not certain. You will realise that
in this example we do not know the performance that is expected from Anna and from Sam. The
contract is invalid.
➢ Generic obligation:
- One that allows a party to choose a performance from a specified genus, or ‘family’ of
performances – the parties must specify who is to make this choice – if not, the debtor will have
the choice.
- The parties must also specify the number/quantity to be delivered.
➢ Alternative obligation:
- Where the parties agree that someone can choose a performance from two or more specified
alternatives.
- If the parties do not specify which party has the right to choose – the debtor has the choice.
- The alternatives must be spelt out; otherwise the obligation could be void for vagueness.
- Once the relevant party has chosen one of the performances, the obligation becomes a simple
one – the debtor is then obliged to make the chosen performance.
- A creditor to an alternative obligation may claim whichever of the specified performances has
been chosen by the person entitled to make that choice.

Exception the general rule above.

o However, note that there are contracts where parties agree that one of the parties will determine
rights and duties or will decide what the performance of each party will be.
o Note that these contracts appear vague but they are nonetheless valid.
o N: B Look at the examples in paragraph 3.211 of the book especially where parties agree that one
of the parties will determine the rights or duties.

Textbook:

For example, X and Y agree that X sells his horse to Y. The performance (the horse) has been
determined. X and Y further agree that Z is to determine the purchase price. This performance (the
payment) is determinable in terms of a legally acceptable criterion (it would have been unacceptable if
only one of the parties were to determine the price on his own). Further examples are the so-called
generic and alternative obligations. B agrees to buy a sheep from A’s flock for R100 (generic
obligation). The performance that A has to deliver is determinable because, unless it is agreed otherwise,
A can choose any average sheep from his flock to deliver to B. Where A, for example, has a black horse
and a brown horse, and B agrees to buy any one of the two for R500 (alternative obligation), the
performance that A must deliver is determinable as A can choose which of the two horses he wishes to
deliver to B.

o The key is that parties agree that one of the parties will decide.
o The contracts are valid and not vague.
o From the examples also note the generic or alternative obligations.
→ Generic: Where Ann offers to buy one of Sam’s cars.
→ Alternative: Where Ann owns Car 1 or Car 2 and Boy offers to buy Car 1 or 2 belonging to Ann.
SU 2.5: Formalities as a Requirement for the Formation of the Contract

Learning material

1. Business Law paragraphs 3.212 – 3.226

Learning objectives

After studying this section you should be able to demonstrate your understanding of formalities as one
of the general requirements for a valid contract. You must be able to:

1. Define and explain formalities;

2. Explain the general common law rule regarding formalities;
3. Discuss agreed formalities and discuss and distinguish between the different variations thereof;
4. Explain formalities prescribed by statute and the consequences thereof, and provide examples of
prescribed formalities and their consequences;
5. Discuss the formalities that apply to the amendment and cancellation of contracts;
6. Explain how written contracts are proved;
7. Explain the rule against extrinsic evidence and exceptions to the rule;
8. Apply the abovementioned principles/law to relevant but unfamiliar scenarios to solve practical
problems.

Introduction
 Formalities refer to related prerequisites that must be complied in the contract.
 General rule of common law: no formalities required for the formation of a valid and binding
contract.
 There are two possibilities with regards to formalities as common law does not provide any
formalities:
• Formalities where they are a requirement for a contract to be valid. E.g It must be in writing
before it is valid.
- Contract comes into being as soon as all contractual requirements (including formalities)
are met.
• Formalities where they are a proof or evidence that a verbal valid contract is concluded. E.g. A
written contract is proof that a verbal contract is concluded.
- Contract comes into being as soon as contractual requirements (excluding formalities) are
met.
• If unsure or intentions of parties are unclear, the latter is assumed.

Statutory/legislation requirements
 In some instances such as when one is selling land, the law/legislation prescribes requirements on
how the contract should be concluded to protect the parties in contract against uncertainty, disputes
and fraud.
 e.g The contract of sale of land in terms of the relevant legislation should be in writing, signed by
all parties and agents for it to be valid.
 This means failure to comply, the contract is invalid.
 N:B See other examples in paragraph 3.216. These requirements cannot be changed or disregarded.

Textbook:

Examples of contracts that have to comply with statutory formalities are the following:

(a) In terms of the Alienation of Land Act 68 of 1981, contracts for the sale of land must be in writing
and signed by all the parties to the contract or by their agents acting on their written authority,
otherwise the contract is null and void.
(b) In terms of the National Credit Act 34 of 2005 the credit provider must deliver to the consumer,
without charge, a copy of a document that records their credit agreement, transmitted to the
consumer in a paper form, or in a printable electronic form [see 12.34]. It is submitted that non-
compliance with this provision has no effect on the validity of the contract.
(c) Contracts for the lease of immovable property for a period longer than ten years have to be in
writing, signed by all the parties to the contract, executed notarially and registered, in order to be
enforceable against third parties or successors in title. These formalities, however, have no bearing
on the validity of the contract.
(d) Contracts of suretyship must be in writing and signed by or on behalf of only the surety, otherwise
the contract is null and void.
Influence of Consumer Protection Act 68 of 2008 (‘CPA’) when formalities are required.

 Generally where CPA is applicable in the conclusion of the contract between the supplier and consumer,
requirements will be prescribed.
 Some contracts will be required to be in writing, in plain language and the record be provided to the
consumer.
 These may be signed manually or electronically.
 The aim of the requirements is to create a fair market where the consumer is protected from
unscrupulous suppliers. (e.g record of contract in case of a dispute)
 Telephonic contracts must be stored for dispute resolution by National Consumer commission.
 The suppliers of goods must provide consumer with written details of the transaction and other business
details. N:B other important details.
 The aim is to make sure that the consumer is adequately informed about the contract concluded and the
details of business of the supplier.
 In case of a dispute, the consumer will furnish the details of the transaction and the identity or place of
business of the supplier will be easily ascertainable.

Alterations/amendments and cancellation of contracts:

All formalities of contracts apply to alterations or changes to contracts and no formalities are applicable
for cancellation of contracts.

Proof of written contracts and application of parol evidence.

Parol evidence
➢ General rule: The written document is the sole (only) evidence of the contract and no other
evidence can be furnished to prove the existence of the contract.
➢ Exception: Other evidence can be furnished in case of unfairness of parol evidence provided:
- Written document is proof of valid contract
- Invalid contract cannot be rectified.
- Other (other than the written contract) evidence that is aimed at rectification of the contract can be
furnished.
- The aim of rectification is to bring the contract in line with true intentions of the parties.
- NB see the examples on paragraph 3.225

Section 52 of the CPA 68 of 2008 when contracts are unjust, unfair and unreasonable
• Requires courts take into account some factors when determining whether contract between the
consumer and supplier is unfair, unjust or prejudicial to the consumer.
• Note the factors in paragraph 3.226 and realise that among the factors, a question will be asked
whether the consumer knew about the presence of an unjust term.
• Thus, evidence other than the written contract will be allowed by courts.
SU 3: Breach of Contract

Learning material
1. Business Law paragraphs 4.01 - 4.106

Learning objectives
In this section the different forms of breach of contract are studied in conjunction with the remedies by
operation of law and contractually agreed remedies. After studying this section you should be able to
demonstrate your understanding of breach of contract and the available remedies, and be able to:

Forms of breach of contract (paragraphs 4.01 – 4.46)

1. Generally define, explain and distinguish between all the forms of breach of contract;
2. Define, discuss and explain the requirements relating to mora debitoris, specifically in relation to
2.1 the possibility and delay of performance;
2.2 mora ex re and mora ex persona, and distinguish between these concepts;
2.3 the enforceability of performance;
2.4 the role of the debtor;
2.5 the role of the creditor; and
2.6 the consequences of mora debitoris;
3. Define, discuss and explain the requirements relating to mora creditoris, specifically in relation to
3.1 the possibility and delay of performance;
3.2 the requirements for performance when it comes to more creditoris;
3.3 the role of the creditor;
3.4 the role of the debtor; and
3.5 the consequences of mora creditoris;
4. Define, discuss and explain positive malperformance, specifically in relation to
4.1 the requirement of positive or negative conduct;
4.2 the requirement of fault;
4.3 the role of the debtor and creditor respectively; and
4.4 the consequences of positive malperformance;
5. Define, discuss and explain repudiation, specifically in relation to
5.1 the requirement when it comes to the conduct of the repudiating party;
5.2 the requirement when it comes to the intention of the repudiating party to repudiate;
5.3 the role of the non-repudiating party; and
5.4 the consequences of repudiation;
6. Define, discuss and explain rendering performance impossible, specifically in relation to
6.1 the requirements for rendering performance impossible;
6.2 the respective roles of the contracting parties; and
6.3 the consequences of rendering performance impossible;
7. Explain why the existence of a valid contract is essential for breach of contract to occur;
8. Differentiate between error, duress, undue influence, misrepresentation, and breach of contract;

Remedies for breach of contract (paragraphs 4.47 – 4.106)

9. Generally name and explain the various remedies available in respect of each form of breach of
contract;
10. Generally name and distinguish between remedies available through operation of law and agreed
contractual remedies;
11. Define and explain specific performance, specifically in relation to
11.1 the forms of breach of contract where, and circumstances when, specific performance is available as a
remedy;
11.2 obtaining of an interdict;
11.3 obtaining an order for specific performance;
11.4 the exceptio non adimpleti contractus; and
11.5 the consequences of specific performance;
12. Define and explain cancellation, specifically in relation to
12.1 the forms of breach of contract where, and circumstances when, cancellation is available as a remedy;
12.2 the lex commissoria; and
12.3 the time, manner and consequences of cancellation;
13. Define and explain cancellation, specifically in relation to
13.1 the forms of breach of contract where, and circumstances when, damages is available as a remedy;
13.2 the aim of damages;
13.3 the forms/categories of damages; and
13.4 the particular principles relating to the quantum and recoverability of damages;
14. Define and explain an acceleration clause as an agreed remedy;
15. Define and explain a penalty clause, in relation to
15.1 an agreed remedy;
15.2 legislative provisions related to penalty clauses; and
15.3 the reduction of penalties;
16. Apply the abovementioned principles/law to relevant but unfamiliar scenarios to solve practical
problems.

Introduction
e.g. When A and B concludes a contract. In the contract A offers to supply B with 6 air conditioners for R 150
000. B on the other hand offers to pay R150 000 for air conditioners. You will realise that A has the duty to supply
6 air conditioners and the right to the purchase price of the air conditioners from B. B has the duty to pay R 150
000 to A and the right to delivery of air conditioners. It may happen that one of the parties fails to fulfil his duty.
E.g A supplies B with 2 air conditioners or B pays A R 50 000 instead of R 150 000. In such cases the parties will
be in breach of contract or failing to act in accordance with their undertakings. They will be liable for breach of
contract.

➔ There are rules that seek to provide a solution or remedy to the party who has suffered because of
the breach of contract.
➔ The result of breach is damage to the innocent party and the solution is restore to the innocent what
he has lost duty to breach.
➔ One of the solutions is to cancel the contract and this will result in the dissolution of contract.
➔ In this chapter we will deal with the coming to an end of a contract due to breach of contract, the
remedies that are available in the event of breach of contract and circumstances that terminate
contracts.

Forms of breach of contract

Textbook explanation is better

e.g When A and B concludes a contract. In the contract A offers to supply B with 6 air conditioners for R 150
000. B on the other hand offers to pay R150 000 for air conditioners. There are five ways in which this contract
can be breached. Each way has its own law/rules, requirements, and consequences There are five ways in which
this contract can be breached.
❖ Let’s refer to the example above.
❖ Failure to perform (A fails to deliver air conditioners because his employees did not collect them
from Durban)
❖ Failure to receive performance on time (B fails to take delivery of the air conditioners on the
agreed date)
❖ Failure to make appropriate performance (B delivers faulty or 3 air conditioners instead of 6)
❖ Failure to continue with duties or undertakings ((A receives the money but refuses to deliver
air conditioners )
❖ Making performance impossible (sets his storage on fire and air conditioners are destroyed)

There are 5 forms of breach of contract:

1) Delay by debtor (mora debitoris)

2) Delay by creditor (mora creditoris)
3) Positive malperformance
4) Repudiation
5) Performance rendered impossible

Delay by debtor (mora debitoris)

e.g When A and B concludes a contract. In the contract A offers to supply B with 6 air conditioners for R 150
000. B on the other hand offers to pay R150 000 for air conditioners. Suppose the parties in this contract agree
that A will deliver the air conditioners on the 1 April 21 and B will make payment on the 30 of April 21 or B
should pay a month after delivery.

→ B will be in mora if she fails to pay within the stipulated time. However, failure to pay does not
automatically mean that he has breached the contract.
→ The following requirements must be present:
• It is still possible for the debtor to perform.
- If his factory catches fire without his fault and as a result he is not able to perform. Then he is not in mora. But
if he deliberately sets his factory on fire and as result making performance impossible then he is in mora.
• Debtor fails to perform on time
- E.g. When A and B concludes a contract. In the contract A offers to supply B with 6 air conditioners for R 150
000. B on the other hand offers to pay R150 000 for air conditioners.
- Suppose the parties in this contract agree that A will deliver the air conditioners on the 1 April 21 and B will
make payment on the 30 of April 21 or B should pay a month after delivery.
- Here if B fails to make payment within the stipulated time, then he is in mora ex re. No need for demand of
performance to be made by the creditor.
- Suppose that parties do not agree on time of performance and merely state that B will perform later. For B to
be in mora A must send a demand to B for B to perform within the stipulated date. E.g Within 30 after receipt
of demand. The time must be reasonable.
- If B fails to perform then he is in mora ex persona.
 • Performance must be due and enforceable
- E.g. When A and B concludes a contract. In the contract A offers to supply B with 6 air conditioners for R 150
000. B on the other hand offers to pay R150 000 for air conditioners.
- Suppose the parties in this contract agree that A will deliver the air conditioners on the 1 April 21 and B will
make payment on the 30 of April 21 or B should pay a month after delivery.
- This means that A should deliver air conditioners in order to have a personal right against B and the set date
of performance within which B must perform must lapse.
- This means that A’s personal right will be due and enforceable.

• Fault not a requirement

- E.g. When A and B concludes a contract. In the contract A offers to supply B with 6 air conditioners for R 150
000. B on the other hand offers to pay R150 000 for air conditioners.
- Suppose the parties in this contract agree that A will deliver the air conditioners on the 1 April 21 and B will
make payment on the 30 of April 21 or B should pay a month after delivery.
- Suppose A delivers the air conditioners to B and B while in the process to pay within the stipulated time suffers
a heart attack and is in coma for 60 days and as a result fails to pay on time.
• Negligence or intent is not a requirement
- Here B will not be in mora because the circumstances are beyond his control (coincidence or act of God). And
also in circumstances where B is trying to pay his creditor A within a stipulated time and A fails to provide his
business Bank account after numerous emails requesting him to do so. B will not be in mora.
- However, where B guarantees (makes a promise) that he will pay within the stipulated time, the absence of
fault will not prevent him from being guilty of breach of contract. In other words, even if coincidence prevents
him from performing on time, he will be still be guilty of breach of contract.

In order for determine if a debtor is guilty of breach of contract due to mora debitoris, first ask:

1) Is performance still possible?

2) Has the debtor failed to perform timeously?
3) Is the performance due and enforceable?

Fault is not a requirement.

Consequences of mora debitoris

o When acts of God or coincidence make performance impossible usually contracts come to an end.
o e.g. Suppose B fails to pay within the stipulated time and is in mora and suddenly due to a pandemic loses
all his assets and businesses shut down and his unable to pay A.
o There is an exception to the aforementioned rule.
o The consequences of delay by debtor keep his contractual obligation alive (perpetuates the legal obligation).
o This is regardless of whether an act of God makes it impossible for him to perform.

Delay by creditor (mora creditoris)

E.g. Suppose A delivers the air conditioners and when B makes attempts to pay, A refuses to provide
his business account after numerous emails.
 Here note that it’s A fault that the debtor is unable to perform. A is in mora creditoris
 However, like mora debitoris, for the creditor to be guilty of breach of contract, the following
requirements should be present:
▪ Performance must be possible
- If it is impossible to perform due to acts of God or coincidence (acts of nature) then creditor is not guilty of
breach but if he fails or makes it impossible for the debtor to perform, the he is guilty of breach.
▪ Creditor delays performance
- The creditor A will be in mora if he refuses to provide or delays to provide his business account for A to pay.
- If the creditor’s cooperation is not necessary, then he will not be in breach of contract.
- Where the debtor undertakes not to do anything then the creditor cannot be in mora.
- E.g. Restraint of trade.
▪ Performance must due and enforceable
- Suppose A delivers air conditioners and B undertakes to pay when he sells his house in 4 months’ time and
will pay the purchase price and plus interest from the date of delivery to when he sells his house.
- A month after delivery B wants to pay the purchase price plus 1 month interest.
- Here A as the creditor can refuse payment from B because the suspensive condition in the contract is to his
advantage (pro creditori).
- The creditor will not be in breach. If the suspensive condition is pro debitori, then debtor can pay before the
stipulated time and if the creditor refuses to cooperate then he will be in breach of contract.
- In the absence of the suspensive condition, the creditor will be in breach if he refuses to accept performance
from debtor because it will be due and enforceable in terms of the stipulated time.
▪ Proper performance must be offered by debtor
- The debtor must make efforts to render proper performance as per the contract. It must be such that the creditor
cannot refuse to accept.
- The performance must terminate the contract.
- Faulty and not adequate performance as per the contract by the debtor can be refused by the creditor and will
not be in breach.
- And performance must be at the time and place stipulated in the contract and delivered in manner that is
suitable to the creditor.
- When this is present, the creditor will be required to perform.
▪ Fault is not required
- Fault is not required for the creditors failure to a accept performance.
- However, if he fails to accept due to an act of God, third party or performance is defective then he will not be
in breach.
- But if he fails because of his actions, e.g refusing to provide the bank account the he is in breach. (fails because
of circumstances within his control).

In order for determine if a creditor is guilty of breach of contract due to mora creditoris, first ask:
1) Is performance still possible?
2) Has the creditor failed to accept performance or to co-operate for performance timeously?
3) Is the performance due and enforceable?
4) Has the debtor offered proper performance?

Fault is not a requirement.

Consequences of mora creditoris
 Breach by creditor does not free the debtor from performing.
 Mora debitoris and creditoris cancel each other. If debtor rectifies his mora by offering to perform and the
creditor refuses to accept then debtors breach is cancelled.
 Suppose B’s performance as debtor is to deliver 30 laptops to A for delivery of air conditioners. When A as
creditor is in breach, B’s duty to care or prevent damage to the items of performance is diminished from
reasonable persons care to intentional damage or damage to gross negligent.
 The obligation of the creditor will stay alive (obligation perpetuated) if he is in breach and while in breach
it becomes impossible for debtor to perform due to no fault of anyone (acts of God or coincidence). The
creditor will still be expected to perform to the debtor due to his breach.

Positive malperformance
E.g A offers to repair B’s drone for R3000. And B must be pay within 10 days after A has fixed and
delivered the drone. Definition Positive malperformance is when performance is of inferior quality or
does not meet the undertakings of the parties in the contract.

Requirements:
→ Positive duty is when upon successful repair and delivery of the drone by A to B, B pays R1500 as final
payment and indicates that other technicians charge R 1500 to repair drones.
→ Negative duty is when a party undertakes to refrain from doing something and does the opposite. See
examples in the Nagel et al Business Law 19th edition.
→ Fault is not required for debtor to be breach due to positive malperformance. But debtor may escape breach
when he can prove that malperfomance is the result of act of God (acts of nature) or actions of third parties.

Consequences of positive malperformance

The innocent or prejudiced party is entitled to normal remedies applicable in contracts.

Repudiation (reject of duty)

Repudiation takes place when a party to a contract either expressly or tacitly and without lawful
justification, communicates to the other his/her unequivocal intention no longer to be bound to or
perform his/her obligations in terms of the contract.

❖ Conduct or action of repudiation

- E.g. A concludes a lease agreement with B and in the contract the parties agree that a 1 months’ notice
is required for cancelation of lease.
- In the contract A makes his house available to B for R 3000 per month for a year.
- In the third month after the conclusion of lease, B indicates that he cancels the contract immediately
without giving notice and vacates the house.
- B’s action or conduct of cancelling the contract amounts to repudiation.
- See other examples of actions that repudiate contracts in the textbook.
❖ Test to determine intention of repudiation:
- To determine whether B had the intention to repudiate the contract, a question will be asked whether in
the circumstances, a reasonable person would conclude that B’s action indicates an intention to repudiate
the contract.
- This is an objective test.
- What B subjectively things or believes is not relevant.
- To be in breach, B is not required to have fault. (Intent or negligence)
❖ Consequences of repudiation:
- E.g. A concludes a lease agreement with B and in the contract the parties agree that a 1 month’s notice
is required for cancelation of lease.
- In the contract A makes his house available to B for R 3000 per month for a year.
- In the third month after the conclusion of lease, B indicates that he cancels the contract immediately
without giving notice and vacates the house.
- B has two options:
• Accept repudiation and end of story, contract terminated (cancels contract).
• Reject repudiation and contract continues (remains in force), entitled to specific performance,
damages and other remedies stipulated in the contract.

Performance rendered impossible

◆ There are three impossibilities:
 Initial impossibility, impossibility from the start, house burned while negotiating. No contract.
 Supervening impossibility, impossibility through no fault of any of parties. Contract comes to
an end.
 Rendering performance impossible due to fault of one of the parties. The party who caused
impossibility is in breach.
◆ Requirements of this breach of contract:
 Intentionally rendering performance impossible.
- Where one directs his will to render performance impossible.
- e.g A offers to sell his car to B and just before delivery decides to set his car on fire to benefit more money
from insurance as compared to sale to B.
 Negligently rendering performance impossible.
- Let’s use the same example A while on his way to deliver the car to B, he decides to answer his cell
phone while driving and as a result crashes on the wall and the car is completely destroyed.
- Consequences of breach of contract:
▪ Rendering performance impossible does not end or close the contract.
▪ There are consequences for the guilty party.
- Debtor renders performance impossible:
▪ Suppose that A delivers the car to B and B in terms of the contract undertakes to deliver his super bike
to A. B before his delivery to A decides to take a road trip with the bike on a rainy day and he falls from
the bike and the bike is completely damaged.
 ▪ Here the creditor has two options:
o Cancel contract, reclaim what he performed or value and damages for breach.
o Keep the contract going, perform his part and claim damages as substitute for performance.
▪ In the example the object of performance is destroyed, the creditor cannot claim specific performance.
But the creditor can with an interdict prevent the debtor from destroying the object if he is aware that
debtor is about to destroy the item.
- Creditor renders performance impossible:
▪ E.g. A offers to sell his car to B and just before delivery decides to set his car on fire to benefit more
money from insurance as compared to sale to B.
▪ Here B the debtor can cancel the contract, return whatever he has received and claim damages.
▪ Can decide to keep the contract going, claim counter performance, return his savings due to the fact that
he cannot be perform his duty because of impossibility by the creditor or his saving can be deducted
against the counter performance and receives the difference(set off)

Remedies for Breach of contract

If one party is in breach of contract, the other party will be by operation of the law be entitled to
remedies. The law will try to restore what the other party has lost.

Remedies by operation of law: Two types of remedies

 Specific performance is when the intentions of the parties are upheld and the contract enforced.
UNDERTAKINGS ARE CLAIMED.
 Cancellation is when the contract comes to end because of a serious breach.
 In the two options, damages are also claimed where the innocent party suffers damage e.g his estate
diminishes due to breach.

Example: A offers to teach B samba dance for R3000 per month. On the date of lesson A switches his phone off
and decides to play his video games. B concludes another contract with C to offer him samba lessons because A
has failed to perform in terms of the contract. In his contract with C, B pays R 600 for one session.

➔ Option A: B can uphold the contract and claim lessons from A plus the loss he suffered when he entered
into an alternative contract. (specific performance plus damages)
➔ Option B: B can cancel the contract and claim loss (damages) suffered when he concluded an alternative
contract.

Agreed remedies
o Parties in contract can agree about a clause that activates (accelerates) specific performance,
cancellation clause that governs how parties can cancel (lex commissaria) contracts and penalty
clause stipulating penalty for breach.
o These remedies replace or substitute common law remedies unless the contract provides otherwise.
o Claims for honouring contracts
Common law remedies
▪ Aimed at compelling parties to perform as per the content of contract
▪ Interdict
- A concludes a lease contract with B for B to run his mechanical workshop at A’s building.
- B pays for the lease and while busy running his business, A offers to lease the building to government to
use as storage for files.
- B can apply for an interdict to prevent A from leasing the building to government.
▪ Specific performance
- This is a natural remedy.
- Is when the order of court compels the party in breach to perform as per the content of the contract.
- This order will not be given if it will result in unreasonable and unfair consequences.
- e.g Forcing people to be partners where trust has been lost by one of the parties or where the relationship
has irretrievably(cannot be fixed) broken down.
- Courts are reluctant to grant this remedy.
- Circumstances of each case will dictate.
- Where it is impossible to perform, courts will not likely grant this order.
- Defence of reciprocity can be used against the person claiming specific performance. (exceptio non
adimpleti contractus)
- Exceptio non adimpleti contractus:
o e.g A offer to sell his generator to B for R 5000 and B accepts and parties agree that delivery of generator and
payment of price will take place simultaneously. A delivers a generator and B discovers that there are missing
parts and B pays R 2500 for the generator.
o If A claims R 5000, B can raise the defence of exceptio in court because A’s performance is defective hence
he paid R 2500 not R 5000 (here, the performance is divisable).
o If B’s performance is not separable (indivisible) then he can cancel the contract or uphold contract and claim
proper performance and withhold any of his performance before proper counter performance is rendered using
exceptio.
o If A decides to take delivery of defective generator from B, he can with exceptio withhold some of the money
due to malperformance.
- Is A entitled to counter performance for his indivisible performance made?
o Yes, the defendant or innocent party always has exceptio to withhold his performance due to malperfomance.
o However, the court may decide in favour of the guilty party if the innocent party is becoming unreasonable by
not granting B an opportunity to rectify.
o The court will give such an order:
 If A is giving defective performance.
 And based on principle equity(fairness) the court should decide in favour of the party in breach.
 If the money to fix the defective performance is deducted from the contract price.
- Acceleration clause:
o A concludes a contract with ABC furniture store to buy a TV set worth R17000 on instalments. In the contract
there is clause that says when A fails to pay two successive monthly instalments, all money owed in terms of
contract should be paid immediately.
o This is an example of an acceleration clause.
Cancellation
 Cancellation of contract is a serious step and parties are not allowed to cancel contracts easily.
 Parties can agreement on clause of cancellation and it must be line with the law.
 In absence of cancellation clause, the right depends on the form of breach and requirements.
 Note that cooling off is another form of lex commissaria (cancellation).
 Cancellation clause:
- Parties must agree about the cancellation clause even with regards to trivial breaches.
- The clause will contain issues of notice of demand of performance before cancellation.
- Failure to comply with the clause may lead to repudiation.

Cancellation because of mora debitoris

❖ When there is no clause, then the creditor can cancel if time is important (time of essence)
❖ Creditor gains the right by making demand of performance to debtor, granted fair duration to
rectify, and debtor fails.
❖ Creditor can cancel.
❖ When is time of essence?
- Where date is set and debtor fails to perform this is mora ex re.
- Based on circumstances time is of essence.
- Cancellation on the grounds of a tacit lex commissoria
- E.g A contracts with B to supply B with meat for his restaurant. A fails to deliver on time and B loses
his business. Parties here agree that time is important and gives creditor right to cancel.
❖ Where creditor has right of rescission (cancellation):
- Where time is not of essence, the creditor can gain right to cancel where he sends demand for
performance if debtor is in mora ex re.
- Grants the debtor adequate time to perform
- And indicate intention to cancel if debtor fails.
- Where no date is set to perform:
• The debtor must be made to be in mora ex persona by sending notice of demand of performance
• Make another demand If debtor fails
• And creditor shows that debtor has defaulted
• Acquires right to cancel.

Cancellation because of mora creditors

 The reasons for cancellation are the same as in mora debitoris
- Where time is of essence.
- And where the debtor acquires right to cancel notice of demand of performance must be made.
Cancellation because of positive malperformance.
e.g A offers to bake and sell a wedding cake to B and she shows B the photo of how the cake will look like. B
accepts the offer and makes payment. Later A delivers the cake and the shape of the cake is skewed and the colour
and flavour are different.

→ If there is no cancellation clause, B can cancel if malperfomance is material as in the example.

This is provided B did not expect this kind of performance when concluding a contract and if she
knew that performance would be that way she would not have concluded the contract.
→ Where malperformance is not material and B decides to keep performance, she can then claim
damages.

Cancellation because of repudiation (rejection of duty)

e.g. A offers to lease his house to B for a year. The two agree that lease can be cancelled with two months notice.
After a month, B indicates that she vacates the house immediately without providing notice.

 This is repudiation or cancellation of contract and A can reject repudiation and uphold the contract.
 However, A can because of the intention to repudiate by B, cancel the contract because here
repudiation is material.
 If B says she is going to pay half the rent money, the test will be whether her intention to repudiate
is material enough. If not, then A cannot cancel but claim damages.
 If B performance can be divided and B says she is going to pay half of the rent money then the
contract can be cancelled partially or pro tanto. This means that only the repudiated part will be
cancelled.

Cancellation where performance is prevented or rendered impossible.

e.g. A offers to sell his car to B and B accepts and pays the price and before delivery A set his car on fire and the
car is destroyed.

 Here specific performance is impossible.

 However, where the performance can divided (divisible) and only one part of the performance is
rendered impossible, the innocent party in the contract can cancel the part made impossible and
keep the other part and claim damages.

Time, method and consequences of cancellation

❖ Time of cancellation:
- The innocent party in the contract must use his right cancel within a reasonable time and if time
lapses then he must provide evidence why she did not use his right within a reasonable time.
- If she does not use the right to cancel expressly or by conduct, then she can uphold or keep the
contract going, claim specific performance and damages. Alternatively, she can provide counter
performance or accept faulty or defective performance.
❖ Method of cancellation:
- No requirements or formalities for cancellation. The contract can be cancelled with spoken
words, conduct or in writing.
- The party cancelling the contract must make sure that his intention is clear to the other party.
Parties may agree on how to cancel the contract.
❖ Consequences of cancellation:
- Contract comes to an end and obligations come to an end.
- Restitution of what is already performed should be returned. Any money still owing in contracts
of continues nature (on going contracts) must still be paid.

Damages (what the innocent party suffers in the event of breach)

e.g A offers to bake and sell a wedding cake to B and she shows B the photo of how the cake will look like. B
accepts the offer and makes payment. Later A delivers the cake and the shape of the cake is skewed and the colour
and flavour are different.

 Damages can be used with specific performance and cancellation of contract.

 Damages are meant to put the innocent party in the position she would have been if the contract was
not breached.
 In case of defective cake, B would quickly buy an alternative cake.
 This means that she would suffer damage.
 Damages entail a positive interest which is the money that will put the innocent party to the position
where she would have been if the contract was not breached.
 Say she spends R 2000 for alternative. The positive interest will be R 2000.
 Due to problems that may arise in claiming damages, parties usually agree on what will be claimed in
case of breach of contract and this is known as penalty clause.

Common law position in case there is no penalty clause. Important principles

• The innocent party must prove the actual damage suffered.
• Damages in money must be proved once and taking into consideration future damages that may be
incurred. The party will not be allowed to claim for future damages.
• The financial position due to breach is compared to the position she would have been if the breach of
contract did not occur.
• If the innocent party benefits, the benefit must be deducted.
• The breach must be the cause of damages.
• The damages may be claimed only if they were foreseen or ought to reasonably have been foreseen
when concluding the contract.
General damages
They flow naturally from the breach of contract and should have been foreseen, e.g Mora interest in the
case of payment. If client pays late, interest is charged as the creditor would have gained interest from
the money if performance was made on time.

Special damages
Special damages do not naturally flow from the breach of contract and not predictable as damages for
breach of contract. The party claiming special damages must prove that they were foreseen and the
parties’ express or agreement by conduct should exist and indicate that these damages are claimable.

 e.g A offers to sell B his car and the car is faulty. Upon delivery, the car just blows up and destroys B’s
property. This is special damage and does not naturally from breach of contract. A to succeed in claiming
damages must prove that the parties expressly or by conduct agreed that the damages are claimable.
 The creditor must act with reasonable care to prevent the damages from the debtor. If not, she may not be
allowed to claim damages.
 Only damages that affect the estate of the creditor can be claimed for breach of contract. Personality damages
must be claimed in terms of the delict.

Penalty clauses
Due to problems with regards to claiming damages, parties can include a penalty clause that will state
that a party who fails to fulfil his obligations will have pay damages or lose something. The stipulated
amount may exceed the actual damage.

Conventional Penalties Act 15 of 1962

 Penalties are regulated by this Act
 Can be claimed in combination with specific performance and cancellation
 Cannot be claimed cumulatively (once and for all)
 Party must claim penalty in terms the clause unless the clause specifically states that she can claim
in terms of common law.
- E.g where the penalty in terms of the clause is inadequate compared to the actual damage.
 Courts may reduce the penalty if it is not reasonably in line with the damages suffered by the
creditor. (out of proportion)
 The court when determining prejudice to the creditor looks beyond patrimonial damage that was
foreseen when concluding the contract but to wider legal interests of the creditor.
- E.g reputation or business of the creditor
SU 4: Termination of contract

Learning material
1. Business Law paragraphs 4.107 – 4.159

Learning objectives
After studying this section you should be able to demonstrate your understanding of the termination
of a contract, and be able to:
1. Distinguish between breach of contract and termination of a contract;
2. Name and define the various methods whereby a contractual relationship may be terminated;
3. Discuss, and differentiate between, the following methods to terminate a contractual relationship:
3.1 Performance, specifically in relation to
3.1.1 the parties involved;
3.1.2 the manner of performance;
3.1.3 the time for performance; and
3.1.4 the allocation of payments;
3.2 Release;
3.3 Compromise;
3.4 Novation of a debt;
3.5 Set-off, specifically in relation to
3.5.1 the nature of set-off; and
3.5.2 the requirements for set-off to occur;
3.6 Merger of debts;
4. Discuss supervening impossibility of performance as an occurrence that terminates a contract;
5. Discuss rehabilitation after insolvency as an occurrence that terminates a contract;
6. Discuss prescription as an occurrence that terminates a contract, specifically in relation to
6.1 Acquisitive and distinctive prescription;
6.2 Strong and weak prescription;
6.3 Prescription periods;
6.4 Commencement of prescription;
6.5 Interruption of prescription;
6.6 Delay of completion of prescription; and
6.7 Related debts;
7. Apply the abovementioned principles/law to relevant but unfamiliar scenarios to solve practical
problems.

Introduction
❖ There are various ways in which contracts can be terminated:
- Resolutive conditions: e.g In the contract where the condition is for Sam to use the house until he gets
married. The existence of the contract is subject to occurrence of uncertain future event.
- Resolutive terms: e.g Sam can use the house until he attains the age of 65 or dies. The existence of the
contract is subject to the occurrence of a certain future event.
- Breach of contract
- Performance
- New contract
- Set off
- Merger
- Impossibility of performance
- Rehabilitation after sequestration
- Prescription

In this study unit we will discuss the last 6 ways in which contracts come are terminated.
Performance
 Contracts are terminated when parties fulfil their duties or undertakings as per their undertakings or
agreement in the contract.
 Debtors must perform.
 However, a third party may perform on behalf of the debtor when the third party intends to do so.
 However, where parties concluded a contract based on special attributes or skills possessed by the
debtor then the debtor must perform.
 E.g Godfrey concludes a contract with Don a famous dancer to teach him Samba.
 In this case parties concluded the contract based on Don’s dancing skills.
 Only Don can perform in this contract.
 Performance can also be rendered to an authorised third party provided the creditor gives authorisation.
 The third party is known as the solutionis causa adiectus.
 The third party is not a party to the contract and thus cannot claim performance.

Manner of performance
◆ Method of payment
- The debtor must make complete and non-defective performance as per the contractual agreement.
- The debtor cannot perform in instalments if this is not part of the agreement.
- The debtor must use the legal tender to perform e.g money
- The creditor is not obliged to accept various forms of payment.
- E.g cheque
◆ Form performance in contract where the debtor should perform a service
- In circumstances where he must deliver something or provide the service this must as per the contractual
agreement.
- E.g If A‘s duty in the contract is to spray the car blue, he cannot decide to spray it red.
◆ Receipt as prima facie proof of payment
- The creditor must provide receipt as it is prima facie evidence that the debtor has performed.
- The debtor can refuse to pay if there is no receipt.
◆ Compromise
- When the debtor performs partially and uses words such as full and final settlement, then she is proposing
a compromise and if the creditor accepts partial performance then he accepts the compromise and he
cannot later claim the balance of the performance.
- e.g A concludes a contract with B. A offers his car for R 40 000 and B accepts and pays R35 000 and say
it is ‘full and final settlement’. Then A accepts without saying anything. This means that A has accepted
the compromise. He accepted to receive half of what he is owed. He cannot later claim the balance.
- However, where A mistakenly believes that he owes R 35 000 only and makes payment and says it is
“full and final settlement”. His debt will not be closed. The creditor can claim the balance.
- In case of doubt because of unclear intention by the debtor, unclear intention from the debtor will be used
against him in terms of contra proferentem rule.
Place of performance
• Note that where no place of performance is stipulated in the contract, this may be deducted (inferred
from the contract itself).
• In contracts where a movable is sold, the seller will make available the object and the buyer must collect.
• The creditor must demand payment immediately or within stipulated time e.g 30 April 21.
• The debtor must pay immediately or within the stipulated time to avoid being in mora debitoris (breach
for delay in fulfilling his duty or undertaking).
• This means that after the demand is made and the stipulated time is communicated to the debtor, the
debtor must approach the seller and make payment.

Time of performance
❖ e.g A concludes a contract with B. A undertakes to sell bricks to B for R 50 000 and B accepts. The
parties agree that B will pay within on or before the 30 April 21 after delivery of bricks.
→ This means that B must pay on or before the 30 April 21.
→ If B pays on the 30 April 21, it must be before midnight of 30 April 21.
→ If B must pay at the offices of A, then it must within office hours e.g 9h00 -17h00.
→ If the 30 April is on Sunday or public holiday day, B can payment on the next day provided the parties
did not agree that payment must be made on a non-business day.
→ Calendar days mean every day of the year.
❖ Contract can also provide that the debtor should pay within a certain date or after a certain date.
❖ Suppose A and B conclude a contract of lease and they agree that rent is payable within 5 days after the
first day of the month.
→ This means that the first day is excluded and the last day will be the 6th day.
❖ Suppose A and B conclude a contract of lease and they agree that rent is payable within 5 days after the
conclusion of the contract.
→ This means the first day is included and the last day of payment will be 4th day of the month.
❖ In circumstances where debt is payable in money and the dates are set and payment of interest is charged
for the benefit of the creditor then following will follow:
→ e.g A concludes a contract with B. In the contract A offers to sell his car to B and B will only pay after
selling his bike in three months’ time. The parties agree that A will deliver and interest will be charged
for the three months while B is waiting sell his Bike.
→ e.g A concludes a contract with B. In the contract A offers to sell his car to B and B will only pay after
selling his bike in three months’ time. The parties agree that A will deliver and interest will be charged
for the three months while B is waiting sell his Bike.
• Here B must perform after three months not earlier as the date is set to advantage of the creditor (pro creditori
as interest is charged for the creditor).
• Interest for three months will be charged and should be payable first.
• However, if it is not stipulated as to when B should pay, then he can pay immediately.
• And certain provisions of the National Credit Act 34 of 2000 provides for early payment of debt to reduce
charges (interest) for instalment contracts. E.g Mortgage bond).
Allocation of payment
 In some instances it happens that a party will owe money due to multiple debts to the same person
or entity.
 Let us make an example: A owes B Super Market R 3000 for groceries on credit, R 2500 for a loan
and R 1000 for transportation of his fruits and vegetables. And interest charged. At the end of
April, A makes a payment of R 2500 to B Super Market. This money is not sufficient to discharge
B’s debts and the parties did not agreement on how the money should be allocated.
 The question is how will this money be allocated.
- The debtor can make allocation on condition that interest is paid first before the capital amount.
- If the debtor does not allocate, then the creditor can allocate for the benefit of the debtor:
 Interest must be paid before capital amount
 Enforceable debts take precedence over unenforceable debts
 Certain (where proof is available) debts must be paid before uncertain debts.
 More serious and greater debts must be paid first or those which are accompanied with
securities such as pledge or mortgage or surety.
 Older debts take precedence
 Where all debts are equally serious and of the same dates, then they are reduce proportionally. This
is how performance terminates contracts.

New Contract as Way of Terminating a Contract

Parties in a contract can terminate an existing contract by concluding a new contract in the form:
 Release
 Compromise
 Novation

Release
 Release is where parties set each other free their contractual duties.
 Example: A offers to sell his car to B and B accepts. A delivers the car to B and they agree that B
will pay at the end of the month. 5 days before the end of the month, B changes his mind because
he has other commitments.
- The parties can both come to an agreement of setting each other free from the contract by release.
- This means both parties must agree to release each other from the contract.
- A and B can agree that B need not pay. This will be a donation to B.
- However, this is not always the case, as they can release each other from their respective duties. If this
is the case, B must return the car to A
- No party can act alone in release. What is key here is the agreement between the creditor and debtor.
Compromise
➢ This is settlement of dispute by making concessions.
➢ Example: A and B who are good friends conclude a contract. In the contract A offers to sell his car
to B for R70 000. The sale of the car is not “voet stoets”. A delivers the car to B and they agree
that B will pay at the end of the month. While driving the car, B concludes that the car should
actually cost R 50 000. B approaches A and a dispute ensues. A insists that the car is priced
correctly and B insists that it should be priced at R 50 000.
- Here parties can settle the dispute by reaching a compromise. In other words they can settle the dispute
by making concessions.
- Compromise does not depend on the validity of the original contract. It can be valid even if the original
contract is invalid.
- They can agree that there car should be price R 60 000 instead of R70 000.
- Comprise creates new rights and new duties. (The car is no longer R 70 000 but R60 000.
- If A or B fails to fulfil their duties in terms of the compromise, they must institute claims or sue each
other in terms of the compromise not the original contract.
- Neither of them can decide to go back to the original contract, unless the agreement of compromise
provides this.

Novation (coming from latin word novus meaning new)

 Novation is conclusion of a new contract with the aim of terminating the original contract.
 e.g A offers to sell his generator to B for R 15 000. A delivers to B and they agree that B will pay
at the end of the month. Just before the end of the month A and B agree that the generator should
be R 16000 as it is fairly new. (Note there is no dispute).
- Here the original contract should be valid and just the debt changes or the debtor changes (delegation
where duties are transferred to another person).
- Here you will realise that there is new debt and the parties are still the same.
- The original contract is terminated.
- But if the second one is invalid, the original is not terminated.
 Substitution of the original debtor with a new debtor.
 A offers to sell his generator to B for R 15 000. A delivers to B and they agree that B will pay at
the end of the month. Just before the end of the month, B’s circumstances change and no longer
needs the generator. C who is B’s friend needs the generator.
- A, B and C can agree that B be substituted with C as the debtor. The generator will be delivered to C and
C will be the new debtor (delegation –transfer of duties).
- In essence there is a new contract between A and C.
- The original contract is terminated.
Set-Off
➔ Set-off is to write off/cancel corresponding debts of creditors and debtors against each other.
➔ e.g A sells his old gear box to B for R 10 000. And A delivers and they agree that B will pay R10
000 at the end of the month. Just before the end of the month A has an emergency and borrows R
5000 from B.
- The parties’ corresponding debts can be written off against each other.
- B by making R 5000 available to A, B’s debt to A debt is partially terminated; he now owes A R5000
instead of R 10 000.
- And A’s debt to B for R 5000 is fully terminated.
➔ Requirement of a set-off:
- Set off can only take place when debts are the same, money-money or goods-goods. And goods must be
of the same quality.
- Set-off is not possible for payment to be made in the future.
- Debts due to natural obligations can be set-off. E.g wagers
- Set-off can only be applicable in liquidated debts, these are debts that are certain (amount is already
known or can promptly and easily be determined)
o e.g based on cheque or deposit to one’s bank account and where proof is easily available without external
evidence. Damages that the courts will determine for defamation (libel) of character cannot be set off as
they are not liquid or certain.
- Debts must be between the same parties and in the same capacities. A trustee of insolvent estate cannot
set off his debts incurred as trustee against debts incurred in his personal capacity.

Merger
• This is where the creditor and the debtor becomes the same person in the same debt.
• In other words, the creditor and the debtor are merged (combined) in respect of the same debt.
• This terminates the contract.
• e.g A concludes a contract of lease with B. In the contract B pays R 7000 to occupy A’ property.
The lease is a 12 months lease. Two months after the lease, B purchases the property and becomes
the owner.
- The lease will be terminated because B who is the debtor in the lease contract has become the creditor as
well because he is the new owner of the property.
Impossibilty of Performance
e.g A sells his drone to B and before delivery A’s house catches fire due to lighting and the drone is
also destroyed by fire.
- Here the contract is terminated because of impossibility due to the act of God or circumstances beyond the
contract of A.
- Suppose A sells his car and caravan to B and only the car is destroyed then. (Performance divisible here). A
can only deliver the caravan and the contract is only terminated with respect to the car as it is completely
destroyed. The parties will be released from their obligations only with respect to the car.
- Where performance is indivisible then contract is totally terminated.
- Where in terms of the law or agreement, one party guarantees performance against supervening
impossibility, then the contract will not be terminated.
- Mora debitoris and creditoris will keep the contract alive even if performance is rendered impossible by acts
of nature. Where the contract is sealed between the seller and the purchaser and delivery has not taken place,
the purchaser assumes the risk of damage due to natural acts.

Rehabilitation after Sequestration

o When the debtor’s liabilities exceed his assets, the debtor will be sequestrated.
o His estate will be liquidated and the trustee appointed for this purposes will pay all his creditors
o After that an order for rehabilitation will be issued.
o All debts due to contracts before sequestration will be terminated.
o However, the release of principal debtor does not release the surety.
- Surety = a person who takes responsibility for another's performance of an undertaking, for example their
appearing in court or paying a debt

Prescription
❖ Prescription is when the claim is terminated due to lapse of time or claiming ownership over one’s
property due to lapse of time.
❖ Prescription is when a debt (for example, obligation to pay money) is extinguished after a period
of time.
❖ There are two types of prescriptions:
 Acquisitive: This is acquiring ownership over one’s property after 30 years or
 Extinctive: Where legal duties or obligations are terminated or extinguished due to lapse of time.
❖ We have two Acts that regulate prescription (focus on extinctive prescription):
 Prescription Act 18 of 1943 provides for weak prescription.
- Debts become unenforceable on completion of the period of prescription.
- Although debts are unenforceable, the debts persist and can still form the basis of suretyship or set-
off; however, it cannot be ceded.
- E.g. If A has 10 years to claim the money owed by B. B’s debt becomes unenforceable after 10
years, however, continues to exist and can be set off, be subject to suretyship but cannot be ceded.
  Prescription Act 68 of 1969 provides for the strong prescription.
- This terminates the debt completely.
- No set-off or suretyship.
- Cession and novation also impossible
- However, the Act provides two exceptions:
• If debtor decides to pay, then the debt is revived even if the debtor pays by mistake not
knowing that the debt has prescribed (the debtor cannot reclaim what he/she has paid).
• And when the debtor wants to rely on prescription must claim it (debtor pleads/invokes
prescription), the court will not apply prescription on its own accord (mero motu) even if the
papers before it show that there is prescription.
• Note the different periods of prescription in the text book. (study this carefully) The period of
prescription is calculated in the ordinary civil method.
Textbook:
Prescription periods
Section 11 of the Prescription Act of 1969 provides for prescription periods of thirty, fifteen, six and three years
respectively:
(a) Thirty years in respect of:
(1) a debt secured by a mortgage bond;
(2) a judgment debt;
(3) any debt in respect of tax levied in terms of any statute; and
(4) any debt owing to the State, regarding the prospecting for and mining of minerals or other substances.
(b) Fifteen years in respect of a debt owing to the State arising from a loan of money and the sale or lease of land,
unless a longer period applies under (a) above.
(c) Unless a longer period applies under (a) or (b) above, six years in respect of a debt arising from:
(1) a bill of exchange or any other negotiable instrument (for example, a cheque or promissory note); or
(2) a notarial contract.
(d) Three years in respect of any other debt, unless specifically provided for by statute [for example, section 135 of
the Liquor Act 87 of 1977].
The period of prescription is determined de die in diem in terms of the ordinary civil method. When the period of
prescription starts on 10 December, it will in the ordinary course of events expire at midnight between 9 and 10
December of the appropriate later year.
• Period of prescription is determined by de die in diem: a year will be 1 Dec 21 to between 31
and 1 Dec 22, 24h00 (midnight).

Commencement of prescription
The commencement of prescription is when the period of prescription begins. The following cases are
considered: debt due and owing; specific performance, damages and penalty clauses; cancellation and
damages

Debt due and owing

 Prescription commences on the date on which the debtor should pay (due date).
 Where the debtor hides the debt, prescription will commence when the creditor becomes aware of
the debt. (The debt becomes due once the creditor knows the debtor and the facts that lead to the
debt.)
Specific performance, damages and penalty clauses
 In circumstances where specific performance is claimed together with damages, prescription starts
on date when the facts that bring about the action happen (cause of action-breach) – commences
on breach of contract.
 In circumstances where there is an acceleration clause, prescription starts on the day of breach (if
stipulated as such in the contract). If not provided in the contract, then on the day when the creditor
chooses to enforce the acceleration clause and the clause comes to operation.

Cancellation and damages

 Where creditor cancels the contract and claims for damages, the prescription for claimed damages
commences at the moment of cancellation.

Interruption of the prescription

 How is prescription disturbed from running (interrupted) and consequently starts afresh (de novo)?
 Example: A owes B and B does not claim until 2 years and 11 months lapses. On the last month,
A calls B and reminds B that him(A) owes B.
- Here prescription will be interrupted and starts afresh on date of acknowledgement of debt by
A (when liability is acknowledged).
- Or where B institutes an action against A. (Issues summons). The creditor must proceed with
the action and claim. Prescription will start afresh from the date of acknowledgement of debt
or date on which judgement can be implemented.

Delay of completion of prescription

Section 13(1) extends prescription by one year from the date when these factors cease to exist:
• Study the list carefully in the textbook and the example.

Textbook:

Section 13(1) provides for the postponement of the completion of the period of prescription for one
year. Prescription would in the ordinary course have been completed, but because of certain
circumstances or impediments, it is not completed before one year has elapsed from the date on which
these circumstances or impediments have ceased to exist.

These circumstances or impediments are:

(a) The creditor is a minor, insane or under curatorship, or he/she is prevented by superior force (for example,
any law or order of court) from interrupting prescription.
(b) The debtor is outside the Republic.
(c) The debtor and creditor are married to each other.
(d) The debtor and creditor are partners and the debt arose out of the partnership relationship.
(e) The creditor is a juristic person and the debtor is a member of its governing body.
(f) The debt is the subject of a dispute subjected to arbitration.
(g) Payment of the debt is claimed from a deceased or insolvent estate or from a company in the course of
liquidation; or from an applicant to which the Agricultural Credit Act 28 of 1966 applies.
(h) Either the debtor or the creditor is deceased and an executor has not yet been appointed.

For example: On his/her sixteenth birthday, A becomes the holder of a promissory note that has been
in circulation for five and a half years. The period of prescription for such a promissory note (as for a
bill of exchange) is six years. In terms of (a) above, the debt in terms of the note will prescribe only one
year after A has attained majority and not in six months’ time.

Example:

A concludes the contract with B. B owes A R 100 000 in terms of the contract and the contract was
concluded 2 years and 11 months ago. And A has been studying in England for the past 2 years and 11
months and is still in England.

o Here prescription will not apply after a month but will only be applicable 1 year after A returns to the
Republic.
o So if A returns 4 years after the conclusion of the contract. The claim will not prescribe after 3 years. Instead
it will prescribe 1 year after his return.

Related debts
➔ Reciprocal contracts: the obligations of both parties are principal obligations, e.g Contract of sale.
➔ E.g A sells his expensive drilling machine to B for R34 000. Here A’s duty is to provide the drilling
machine and B duty is pay R 34 000. Both obligations are principal obligations.
➔ The two debts will prescribe when the last debt of the two debts prescribes.
➔ Subsidiary debts will prescribe when together with the principal debt even their date of prescription
has not yet arrived. E.g. interest
THEME 2: SELF ASSESSMENT

ClickUP: Week 1&2 Self Assessment

Question 1
Complete the following sentence: A mere social appointment (like a meal with a friend) is
___________________

a) not a contract, because the serious intention to be legally bound by the agreement is lacking.
b) a contract because the validity requirements to be bound by law have been met.
c) a contract, because the serious intention to be bound by law to the agreement is lacking.
d) not a contract because the serious intention to be bound by law exists.
e) a contract, because the serious intention to be bound by law exists.

Question 5
Jane advertised that she wants to sell her horse, Black Beauty. Maggy, who had her eyes on the horse
for some time, offered Jane R35 000 for the horse. Jane then said that she will not accept any amount
below R45 000. In response to this Maggy said that she cannot afford more than R37 000. Jane’s answer
was that the horse is very dear to her and she cannot let the horse go for less than R42 000. Maggy then
said that she will have to think about it and that she would come back to Jane. The legal position under
these circumstances is as follows:

a) Jane made the last offer.

b) Consensus was reached between Jane and Maggy.
c) No valid offer was made.
d) Maggy accepted Jane’s offer.
e) The first offer was made by Jane.

Question 6
In which case does an offer not terminate?

a) Offer is revoked after it has already been accepted.

b) A counter offer is made.
c) Acceptance of an offer is required for a certain period of time, but is accepted on time.
d) The addressed becomes contractually incapacitated after the offer is accepted.
e) The provider dies after the offer has been accepted.
Question 8
Complete the following sentence: Consensus as a requirement for the conclusion of a contract entails
that:

a) Both parties should have the intention to create a natural commitment with undeterminable legal
consequences if they agree on the purpose and content of the contract.
b) At least one party must intend to create a particular legal commitment with particular legal consequences
if they agree on the content of the contract.
c) Both parties should have the intention to create a particular legal commitment with certain legal
consequences, while they do not necessarily agree on the purpose and content of the contract.
d) At least one party should have the intention to create a particular legal commitment with certain legal
consequences, while not necessarily agreeing on the purpose and content of the contract.
e) Both parties should have the intention to create a certain legal commitment with particular legal
consequences if they agree on the purpose and content of the contract.

Question 9
Indicate under which of the following circumstances (if any) a valid cession took place.

a) In terms of a contract of sale ABC Partnership owed R5 000 to Lucky’s Stores. ABC Partnership
transferred the duty to pay the R5 000 to Lucky’s Stores without Lucky’s Store’s consent to one of ABC
Partnership’s clients.
b) In terms of a contract of sale ABC Partnership owed R5 000 to Lucky’s Stores. Lucky’s Stores ceded the
right to claim R5 500 from ABC Partnership without ABC Partnership’s consent to Lucky’s Store’s
bank.
c) In terms of a contract of sale ABC Partnership owed R5 000 to Lucky’s Stores. ABC Partnership
transferred the duty to pay the R5 000 to Lucky’s Stores with Lucky’s Store’s consent to one of ABC
Partnership’s clients.
d) In terms of a contract of sale ABC Partnership owed R5 000 to Lucky’s Stores. Lucky’s Stores ceded the
claim (R5 000) against ABC Partnership without ABC Partnership’s consent to Lucky’s Store’s bank.
e) In terms of a contract of sale ABC Partnership owed R5 000 to Lucky’s Stores. Lucky’s Stores ceded a
part of the claim (R2 500) against ABC Partnership without ABC Partnership’s consent to Lucky’s
Store’s bank.

Question 10
Choose the most correct option: It is vital for the creation of a contract ____

a) that the party making the offer must know of the acceptance in writing.
b) that the party making the offer also made it in general.
c) that the party making the offer must know that the offer has been accepted.
d) that the parties do not necessarily have to agree on each part of the contract.
e) None of the given options is correct.
Question 11
Which of the following is not a legal fact leading to a legal obligation?

a) Administrative or official authority

b) Will
c) Delict
d) Contract
e) Statute

Question 12
OK Furniture Stores sent a new iron to Billy Bob with a letter attached to it stating the following: “A
binding contract is hereby concluded between you [Billy Bob] and us [OK Furniture Stores], unless you
decline this offer by sending the item back to us within the next three days.” On what basis would such
an offer be invalid?

a) The offer has not come to the knowledge of Billy Bob.

b) The offer is unclear.
c) The offer is ambiguous.
d) The offer does not comply with formalities.
e) Prohibition of negative option marketing in terms of section 31 of the Consumer Protection Act 68 of
2008.

Question 13
Negative offers involve certain unique features. Which of the following is not a feature?

a) The “seller” informs the “buyer” that a purchase and sale agreement has already been concluded.
b) The “seller” agrees with the “buyer” that an agreement will be concluded subject to certain conditions.
c) The “buyer” can inform the “seller” that he does not want to conclude the transaction.
d) Any agreement concluded under this practice is void.
e) The “buyer” can send back the goods within a certain period, eg. after seven days.

Question 15
Delegation as a valid multiparty agreement took place in the following case:

a) ABC Partnership owed R5 000 to Lucky's Stores in terms of a purchase agreement. ABC Partnership
transferred with Lucky's Stores permission the obligation to pay the R5 000 to Lucky's Stores to one of
ABC Partnership's customers (which owed money to ABC Partnership).
b) ABC Partnership owed R5 000 to Lucky's Stores in terms of a purchase agreement. ABC Partnership
and Lucky's Stores have transferred both the obligation to pay the R5 000 to Lucky's Stores and to claim
the R5 000 from ABC Partnership to other parties.
c) ABC Partnership owed R5 000 to Lucky's Stores in terms of a purchase agreement. Lucky's Stores, with
ABC partnership's permission, transferred the right to claim the R5 000 from ABC Partnership, to one
of ABC Partnership's clients (to whom ABC Partnership owed money).
d) ABC Partnership owed R5 000 to Lucky's Stores in terms of a purchase agreement. ABC Partnership
transferred the right to claim R5 000 without Lucky's Stores permission to one of ABC Partnership's
clients (to which ABC Partnership owed money).
e) ABC Partnership owed R5 000 to Lucky's Stores in terms of a purchase agreement. ABC Partnership has
transferred the obligation to pay Lucky's Stores without the Lucky's Stores permission to transfer to one
of ABC Partnership's customers (which owed money to ABC Partnership).
ClickUP: Week 2&3 Self Assessment

Question 1:
Andrew, who lives and works in Bloemfontein, made a telephonic offer on 15 January 2020 to Benny
to sell Andrew’s Volkswagen to Benny for R150 000. Benny accepted the offer by way of letter, which
he posted in Cape Town on 1 February 2020. Andrew received the letter on 5 February 2020 in
Bloemfontein, but only read the letter on 7 February 2020 at Pretoria. The date and place where the
contract between Andrew and Benny came into existence were:
a) 5 February 2020 at Bloemfontein.
b) 7 February 2020 at Pretoria.
c) 1 February 2020 at Cape Town.
d) 15 January 2020 at Cape Town.
e) None of the mentioned options.

Question 2
Choose the correct option:
a) Contracts that are based on fraudulent, negligent or innocent misrepresentation are void from the
beginning.
b) Contracts that are based on fraudulent, negligent or innocent misrepresentation are valid, but voidable.
c) All contracts that are based on innocent misrepresentation are valid, but damages may be claimed.
d) Only contracts that are based on fraudulent, negligent or innocent misrepresentation are valid and
enforceable.
e) Innocent misrepresentation is when a false fact is negligently presented to be true.

Question 3
Maggy and Susan are married in community of property and own two fridges, which are both still in a
good condition. One of these fridges has been kept in storage for the past year. On 1 May 2017, Maggy
met their new neighbour named Peter, who was in serious need of a fridge at the time. Maggy decided
to donate one of their fridges to Peter without discussing it with Susan first. The following day, Susan
met with Peter at his house and recognised the fridge in Peter’s house. Susan is of the opinion that
Maggy’s donation to Peter is void. Is Susan’s viewpoint true or false?
a) True, when a spouse married in community of property alienates the furniture of the joint estate, the
acting spouse is required to obtain written consent attested by two witnesses from the other non-acting
spouse.
b) False, the rules applicable to contractual capacity of spouses married in community of property do not
apply to same-sex marriages.
c) False, Susan must have noticed that the fridge was no longer in their storage room and therefore she
tacitly consented to the donation.
d) True, when a spouse married in community of property alienates the furniture of the joint estate, the
acting spouse is required to obtain written consent from the other non-acting spouse.
e) True, when a spouse married in community of property alienates the furniture of the joint estate, the
acting spouse is required to obtain consent from the other non-acting spouse, but such consent does not
have to comply with any formalities.
Question 4
Mister Jacobs is 87 years old and not intellectually as sharp as he used to be. Mister Swart from the
Organisation for the Disabled visisted Mister Jacobs. Mister Swart manipulated Mister Jacobs to
bequeath 50% of his estate to the Organisation for the Disabled. Mister Swart’s conduct may constitute:
a) Undue influence, since Mister Swart’s stories weakened Mister Jacobs’s resistance and Mr Jacobs
became more pliable than usual.
b) Misrepresentation, since Mister Jacobs’s bequest would not go to the Organization for the Disabled, but
into Mister Swart’s own pockets.
c) Economic bribery, since Mister Swart’s stories weakened Mister Jacobs’s resistance and Mr Jacobs
became more pliable for corruption than usual.
d) Duress, since Mister Jacobs feared for physical injuries after Mister Swart threatened him.
e) Duress, since Mister Swart’s stories weakened Mister Jacobs’s resistance and Mr Jacob became more
pliable than usual.

Question 5
The lease contract between Andrew and Benny contained the following stipulation: “The lease contract
will continue, until Benny has obtained his BCom degree.” The legal position under these circumstances
is as follows:
a) Should Benny obtain his BCom degree, the lease contract comes to an end, due to a resolutive condition.
b) Should Benny never obtain his BCom degree, the lease contract will never come into existence.
c) Should Benny never obtain his BCom degree, the lease contract comes to an end, due to a suspensive
condition.
d) Should Benny obtain his BCom degree, the lease contract comes to an end due to a resolutive term.
e) None of the mentioned options.

Question 6
Andrew wishes to buy the farm “Voorspoed” from Benny. The purchase price has been set, but Andrew
cannot find enough capital to finance the sale. Benny gives Andrew a right of option which implies that:
a) The option grantor keeps the possibility of a transaction open for an undetermined time period based on
a fixed substantive offer by the option holder.
b) The seller grants the possible purchaser the first opportunity to make an offer when the seller wants to
sell, based on a preliminary agreement.
c) The option grantor keeps the possibility of a transaction open for a determined or determinable time
period, based on a preliminary substantive offer by the option holder.
d) The option grantor keeps the possibility of a transaction open for a determined or determinable time
period, based on a fixed substantive offer by the option holder.
e) The option grantor keeps the possibility of a transaction with the option holder open based on a
preliminary substantive offer, unless he receives a better offer.
Question 7
In terms of a contract of sale ABC Partnership owed R5 000 to Lucky’s Stores. ABC Partnership transferred the
duty to pay the R5 000 to Lucky’s Stores with Lucky’s Store’s consent to one of ABC Partnership’s clients.
Simultaneously Lucky’s Stores transferred the right to claim the R5 000 from ABC Partnership without ABC
Partnership’s consent to Lucky’s Store’s bank. The legal position under these circumstances is as follows:

a) No valid transfer of rights nor duties took place.

b) A binary agreement came into existence.
c) The legal obligation between Lucky’s Stores and ABC Partnership continues to exist.
d) A valid assignment took place.
e) A valid cession took place between ABC Partnership and ABC Partnership’s client.

Question 8
Marisha is your confused friend. She informs you that she wanted to buy a painting of blue gum trees at an art
auction that took place on 10 January 2018. However, the auctioneer refused to close the bid on her. You ascertain
that the circumstances were as follows: The auction conditions did not indicate whether or not the auction was
with or without reserve. Marisha and one other person bid for the painting. Later on the other person stopped
bidding with the result that Marisha made the last bid for the painting. However, the auctioneer refused to sell the
painting to Marisha. The legal position under these circumstances is as follows:

a) If the auction indeed took place without reserve (as is presumed), the auctioneer was obliged to sell the
painting to Marisha.
b) If the auction indeed took place with reserve (as is presumed), the auctioneer was not obliged to sell the
painting to Marisha.
c) Due to the fact that the auction was without reserve, the auctioneer erred by not selling the painting to
Marisha.
d) Due to the fact that the auction was without reserve, the auctioneer acted correctly by not selling the
painting to Marisha.
e) Due to the fact that the auction was with reserve, the auctioneer erred by not selling the painting to
Marisha.

Question 9
Tshepo, a 40-year-old bachelor, decided to get married. He requested his closest friend, Lucas, to be his best man.
Lucas gladly agreed. On the day of the wedding Lucas did a disappearing act. Lucas, who was still a bachelor at
45, confided to one of their mutual friends that he was ashamed to be the best man because he did not even have
a girlfriend. Choose the most correct answer:

a) None of the options is correct.

b) A civil obligation exists, as a common intention existed and every party informed the other party about
their intention.
c) No civil obligation exists, as Tshepo and Lucas had no intention to be legally bound.
d) A valid contract was concluded between Tshepo and Lucas, as consensus existed.
e) No valid contract was concluded, as nothing was reduced into writing.
Question 10
OK Furniture Stores sent a new iron to Billy Bob with a letter attached to it stating the following: “A
binding contract is hereby concluded between you [Billy Bob] and us [OK Furniture Stores], unless you
decline this offer by sending the item back to us within the next three days.” On what basis would such
an offer be invalid?

a) Prohibition of negative option marketing in terms of section 31 of the Consumer Protection Act 68 of
2008.
b) The offer has not come to the knowledge of Billy Bob.
c) The offer does not comply with formalities.
d) The offer is unclear.
e) The offer is ambiguous.

Question 11
Negative offers involve certain unique features. Which of the following is not a feature?

a) The “seller” informs the “buyer” that a purchase and sale agreement has already been concluded.
b) Any agreement concluded under this practice is void.
c) The “buyer” can inform the “seller” that he does not want to conclude the transaction.
d) The “buyer” can send back the goods within a certain period, eg. after seven days.
e) The “seller” agrees with the “buyer” that an agreement will be concluded subject to certain conditions.

Question 12
Lucas is a famous inventor of new environmentally friendly trucks. He stands in his ultramodern
workshop and admires the revolutionary new electrically powered truck that he designed for the
company, Big Riggs, which still owes him R500 000. The R500 000 owed to Lucas is an example of ...

a) A personal right because Lucas is entitled to institute an action against Big Riggs.
b) A real right because Lucas can claim the R500 000.
c) A personality right because Big Riggs must still pay Lucas in person.
d) An intellectual property right because Big Riggs used Lucas’s creation to make money and did not pay
him.
e) A real right because Big Riggs owes Lucas for the ownership they have obtained in the environmentally
friendly truck.
Question 13
Indicate under which of the following circumstances (if any) a valid cession took place.

a) In terms of a contract of sale ABC Partnership owed R5 000 to Lucky’s Stores. Lucky’s Stores ceded a
part of the claim (R2 500) against ABC Partnership without ABC Partnership’s consent to Lucky’s
Store’s bank.
b) In terms of a contract of sale ABC Partnership owed R5 000 to Lucky’s Stores. ABC Partnership
transferred the duty to pay the R5 000 to Lucky’s Stores without Lucky’s Store’s consent to one of ABC
Partnership’s clients.
c) In terms of a contract of sale ABC Partnership owed R5 000 to Lucky’s Stores. Lucky’s Stores ceded the
right to claim R5 500 from ABC Partnership without ABC Partnership’s consent to Lucky’s Store’s
bank.
d) In terms of a contract of sale ABC Partnership owed R5 000 to Lucky’s Stores. Lucky’s Stores ceded the
claim (R5 000) against ABC Partnership without ABC Partnership’s consent to Lucky’s Store’s bank.
e) In terms of a contract of sale ABC Partnership owed R5 000 to Lucky’s Stores. ABC Partnership
transferred the duty to pay the R5 000 to Lucky’s Stores with Lucky’s Store’s consent to one of ABC
Partnership’s clients.

Question 14
In which case does an offer not terminate?

a) Offer is revoked after it has already been accepted.

b) The addressed becomes contractually incapacitated after the offer is accepted.
c) A counter offer is made.
d) Acceptance of an offer is required for a certain period of time, but is accepted on time.
e) The provider dies after the offer has been accepted.

Question 15
Complete the following sentence: Consensus as a requirement for the conclusion of a contract entails
that:

a) Both parties should have the intention to create a natural commitment with undeterminable legal
consequences if they agree on the purpose and content of the contract.
b) Both parties should have the intention to create a particular legal commitment with certain legal
consequences, while they do not necessarily agree on the purpose and content of the contract.
c) At least one party should have the intention to create a particular legal commitment with certain legal
consequences, while not necessarily agreeing on the purpose and content of the contract.
d) Both parties should have the intention to create a certain legal commitment with particular legal
consequences if they agree on the purpose and content of the contract.
e) At least one party must intend to create a particular legal commitment with particular legal consequences
if they agree on the content of the contract.
Lecture Notes: Self Assessment

SU 1: History of the South African Law of Contract, an Overview of Legal Obligations and the
Transfer of Rights and Duties

Question 1:
In your own words, define the following terms:
→ Legal obligation
→ Delict
→ Contract
→ Contractual rights
→ Creditor
→ Debtor
→ Juristic and legal fact
→ Cession
→ Cedent
→ Cessionary
→ Delegation
→ Assignment

Answer:

 Legal obligation

Notes: A legal obligation is a legal relationship between two legal subjects created by a legal fact or
juristic fact or bases such as contract or delict to create personal rights and duties between the legal
subjects.

Textbook: A legal obligation is a legal tie between legal subjects, recognised by law, that, through
established legal facts (such as a contract or delict), creates (personal) rights and duties between the
parties.

Own words: Legal obligation refers to the legal relationship that exists between two legal subjects that
creates – through established legal facts (such as a contract or delict) – person rights and duties between
the parties.

 Delict

A delict is a source of civil obligation, which means that it is a legal or juristic fact that creates personal
rights and duties. A delict refers to a civil wrong wherein one person through his or her act is unlawful
and either through intention or negligence causes harm or damage to another’s property.
 Contract

A contract is a source of civil obligations, which means that it is a legal or juristic fact that creates
personal rights and duties. A contract can be defined as an agreement (based on consensus between
subjects having contractual capacity, with the agreement considered legal and physically possible, and
within formal requirements) made with the serious intention of creating a legal obligation that, in turn,
gives rise to the parties’ rights and duties.

 Contractual rights

Contractual rights refer to a guaranteed set of rights given to all the parties (two or more) when they
enter into a valid contact. They are clearly stated in the contract to avoid any future disputes, and all the
parties involved have to abide by them. They usually involve business or trade matters, mostly sale and
purchase of services and products; however they can include other subjects also. Contractual rights are
therefore those rights that are guaranteed under a contract and which are legally-enforceable.

 Creditor

Within the context of the law of contracts, the term ‘creditor’ refers to one (or more) of the two (or
more) parties who entered into a contract that legally binds the parties to specific rights and duties. The
creditor has the right to claim the performance set out in the contract.

 Debtor

Within the context of the law of contracts, the term ‘debtor’ refers to one (or more) of the two (or more)
parties who entered into a legal contract that legally binds the parties to specific rights and duties. The
debtor bears a duty to make the performance agreed upon in the contract.

 Juristic and legal fact

A Juristic or legal fact refers to a circumstance that, through a legal norm, establishes, changes, or
terminates legal relations. In many cases, the basis for rights and duties is a complex set of juristic or
legal facts. Juristic facts are divided into two categories: events and acts. Events are circumstances
occurring independently of human will, such as earthquakes or the expiration of a time limit. Acts, on
the other hand, are circumstances occurring through human will. Acts may be legal (observance of the
law by citizens, application of the law by state bodies, judicial decisions, and transactions) or illegal
(crimes, administrative and disciplinary violations, and violations of civil law).
 Cession

From the textbook:

Cession takes place when personal rights are transferred from one party to the contract (the cedent) to
another person (the cessionary). For example, A owes R500 to B in terms of a loan made by B to A. B decides
to donate R500 to X. B (the cedent) can effect this donation by ceding his right to claim the R500 from A, to X
(the cessionary). X can then claim the R500 from A. All rights that are transferable may be ceded.

The following general rules apply to cession:

(a) The cedent and the cessionary must enter into a contract of cession.
(b) The consent, knowledge or co-operation of the debtor is not required. If the debtor does
not know of the cession and he/she makes performance to the cedent (the original creditor), his/her duty to
perform is extinguished. The cessionary cannot claim further performance from the debtor. It would,
therefore, be wise for the cessionary to notify the debtor of the cession.
(c) No formalities are required.
(d) There is no prohibition against the cession of personal rights, except where these rights are of a highly
personal nature (for example, where A and B agree that B will give music lessons to A), or where cession
is prohibited or limited by legislation, or where the parties reach an agreement prohibiting cession.
(e) Generally speaking, a right may only be ceded in its entirety, because a debtor could then be exposed to a
multiplicity of actions where only a part of a right is ceded to another creditor.
(f) In accordance with the principle of nemo plus iuris that no one may transfer more than he/she has him-
/herself, the claim is transferred together with all the benefits, privileges, disadvantages and limitations
relating thereto.
(g) Lastly, a right may be ceded as a form of security by a so-called cession in securitatem debiti. Such a cession
may be in the form of an out-and-out security cession where the right passes in ownership to the cessionary,
combined with an undertaking that the cessionary will cede the right back to the original cedent where
the principal debt is paid and the need for security lapses. Another form of security cession is merely a
cession in the form of a pledge, where only the quasi-possession of the right transfers to the cessionary, yet
the ownership of the right remains with the cedent. On payment of the principal debt the right that was ceded
as security reverts to the original creditor. The courts at present prefer the latter as the default position unless
the parties expressly agree to an out-and-out cession.

Own answer:

Cession takes place when personal rights are transferred from one party to the contract (the cedent)
to another person (the cessionary), without the requirement of the debtor’s knowledge, consent or co-
operation. The cedent and cessionary must enter a contract of session and the rights must be transferred
in its entirety, following the principle of nemo plus iuris wherein the cedent may only transfer the rights
he/she has a claim to and that such rights must be transferred along with all the benefits, privileges,
disadvantages and limitations relating thereto. All personal rights (except those of a highly personal
nature) can be ceded and no formalities are required.
 Cedent

When a cession takes place, wherein personal rights are transferred from one party to the cession
contract to another, the cedent refers to the party who cedes his/her personal rights to the cessionary.

 Cessionary

When a cession takes place, wherein personal rights are transferred from one party to the cession
contract to another, the cessionary refers to the party to whom the personal rights are ceded to the cedent.

 Delegation

From the textbook:

Duties are transferred from one party to a contract to another person by means of delegation. For example,
A (a debtor) owes R500 to B (a creditor) in terms of a loan made by B to A. A may delegate his duty to pay to X.
X (the new debtor) must now pay the R500 to B. As it is of vital importance for a creditor to know the identity of
the debtor from whom he/she has to exact or claim performance, the creditor’s consent is required before
delegation may take place. A delegation is, therefore, always a tri-partite agreement between the original debtor,
the new debtor and the creditor.

Own answer:

Delegation refers to the transfer of duties from one party to a contract to another person, with the
requirement of the creditor’s consent to ensure that the creditor knows the identity of the debtor to
whom the duties have been transferred and from whom the creditor must claim performance. A
delegation is always a tri-partite agreement between the original debtor, the new debtor and the creditor.

 Assignment

From the textbook:

Where the cession of rights and delegation of duties in terms of the same obligation take place at the same time,
such simultaneous transfer of rights and duties is called assignment. As the transfer of duties is part of the
assignment agreement, it goes without saying that it will also be a tri-partite agreement.

Own answer:

Assignment refers to the simultaneous occurrence of the cession of rights and the delegation of duties,
wherein the requirements of a cession and a delegation must be met respectively. The transfer of duties
that forms part of an assignment makes the assignment agreement a tri-partite agreement in order to
ensure that the creditor is informed of the identity of the new debtor.
Question 2:
You are a party to a lease contract in terms of which you lease an apartment for residential purposes
from Company A. Your employer transfers you to Cape Town while there is still 6 months left on your
rental agreement. Which option would best cater for your needs: cession, delegation or assignment?
Provide comprehensive reasons for your answer by discussing the benefits and shortcomings of you
chosen option, and comparing these with the other available options.

Answer: The most beneficial option would be to enter into an assignment agreement, wherein my rights
to claim the rights to make use of the apartment to a new party A, who will act as both the cessionary
and the new debtor, as I will also transfer the duty to pay for the apartment to party A by means of
delegation. Company A will be informed of this transfer of duty to party A.

SU 2.1.2 Consensus and the Content of the Contract

Question 1
Lima is the owner of a game farm. Lima and Kilo concluded a contract in terms of which Kilo must
construct a one kilometre stretch of road connecting Lima’s house to the provincial road. The parties
agreed that the road should have a concrete surface and be at least four metres wide. The following
clauses are found in the contract between Kilo and Lima. Identify the type of clause.

• Kilo and Lima concluded the agreement subject to municipal approval for construction of the road
being obtained by no later than 10 September 2019.

From the textbook:

Where a contract is subject to a condition, all or some of the duties to perform in terms of the contract are subject to the
occurrence of an uncertain future event. There are two kinds of conditions, namely, suspensive and resolutive conditions. In
the case of a suspensive condition, performance cannot be claimed before the uncertain future event occurs. In the case of a
resolutive condition, the continued existence of the contract depends on the occurrence of the uncertain future event. This
event must not be illegal or in conflict with the aim of the contract. It is important to note that a condition does not prevent the
contract from coming into being (the creation of a legal obligation through a juristic fact). The enforcement of the contract or
its continued existence depends on the condition.

From the class notes:

Suspensive conditions refers to a situation where performance cannot be claimed until the occurrence of the condition. The
non-occurrence of the condition suspends the enforcement of the contract. E.g. A agrees to sell his crops to B and B buys the
crops. This is on condition that the crops will successfully grow and A will harvest. The contract is sealed but subject to a
suspensive condition. B can only claim the crops unless A’s crops have grown and has harvested. A cannot destroy his crops.

Answer: Suspensive condition → Since the performance to construct the road cannot be claimed until
the occurrence of an uncertain future event (the municipal approval), the contract exists, but it will only
be enforceable if the municipal approval is obtained.
• The contract will terminate immediately if Kilo is sequestrated or dies. Lima shall pay Kilo a fee
of R100 000 for the construction of the road.

From the textbook:

Term: The word “term” has a special legal meaning. In the case of a term, either the enforcement or the continued
existence of the contract is made subject to the occurrence of a specified certain future event, even if it is not
certain at what time such event will occur. The main difference between a condition and a term is that in the case
of a condition it remains uncertain whether the event will actually occur, while in the case of a term the event is
certain to occur, although the exact moment might be uncertain. Such uncertainty does not change a term into a
condition. Examples of terms are death and the passing of time. Both are a certainty. A term can be either
suspensive or resolutive. Apart from the fact that the future event mentioned in a term is certain to happen, the
effect of a term on the enforcement and existence of a contract is the same as that of either a suspensive or
resolutive condition.

Resolutive term: A term is resolutive if the continued existence of the contract depends on the occurrence of a
certain future event, even if it is uncertain exactly when it will happen. For example, “The employee must remain
in the service of his employer until he reaches the age of 65 years or until his death, whichever occurs first.”

Condition: Where a contract is subject to a condition, all or some of the duties to perform in terms of the contract
are subject to the occurrence of an uncertain future event. There are two kinds of conditions, namely, suspensive
and resolutive conditions. In the case of a suspensive condition, performance cannot be claimed before the
uncertain future event occurs. In the case of a resolutive condition, the continued existence of the contract depends
on the occurrence of the uncertain future event. This event must not be illegal or in conflict with the aim of the
contract. It is important to note that a condition does not prevent the contract from coming into being (the creation
of a legal obligation through a juristic fact). The enforcement of the contract or its continued existence depends
on the condition.

Answer: Since the existence of the contract depends on a certain future event (the death of Kilo) and
an uncertain future event (the sequestration of Kilo), this clause can be seen as both a resolutive term
and a resolutive condition. The resolutive term refers to the termination of the contract based on the
certain future event (even though the time of occurrence is uncertain) of Kilo’s death and the resolutive
condition refers to the termination of the contract based on the uncertain future event of Kilo’s possible
sequestration.
• The contract will not continue for longer than three calendar years, irrespective of whether or not
the project is completed.

From the textbook:

Term: The word “term” has a special legal meaning. In the case of a term, either the enforcement or the continued
existence of the contract is made subject to the occurrence of a specified certain future event, even if it is not
certain at what time such event will occur. The main difference between a condition and a term is that in the case
of a condition it remains uncertain whether the event will actually occur, while in the case of a term the event is
certain to occur, although the exact moment might be uncertain. Such uncertainty does not change a term into a
condition.

Resolutive term: A term is resolutive if the continued existence of the contract depends on the occurrence of a
certain future event.

Answer: Resolutive term → since the continued existence of the contract is dependent on a certain
future event (the lapsed time of three calendar years).

• Kilo may not disclose any information pertaining to the location of the rhinos on Lima’s farm to
third parties.

From the textbook:

A modal clause (modus) is a contractual stipulation in terms of which one party places a duty on the
other party to deliver a specific performance. For example, X donates his farm to B subject to the modus
that B builds a school on it. If B accepts the donation, he must build the school. Like a condition, a
modus always refers to a future event.

Answer: Modal clause → since the clause places a duty on Kilo for performance of not disclosing
information pertaining to the location of the rhinos on Lima’s farm to third parties and this duty refers
to a future event.

OR: A term of incidentalia. These are terms agreed to by the parties for their own purposes and in order
to fulfil their own needs arising from their specific circumstances.
SU 2.1.4: Factors that influence Consensus

Question 1:
On 1 January, Amy (who lives and works in Pretoria) saw an advertisement in the newspaper in terms of which
Chase (who lives and works in Johannesburg) advertised that he (Chase) sold iPads for R 10 000 each. On 5
January, Amy phoned Chase and told him that she was interested in buying an iPad. Chase told Amy that due to
the change in exchange rate, the price per iPad had increased to R 15 000. Amy informed Chase that she would
“think about it”. On 12 January, Amy sent a WhatsApp to Chase, confirming that she will purchase an iPad at
R15 000, but only if Chase paid for the courier charges. On 15 January Chase (whilst driving between
Johannesburg and Bloemfontein) responded with a “thumbs up” emoji in a WhatsApp to Amy. Amy’s phone
received the WhatsApp on 16 January, but she only read the WhatsApp on 17 January whilst on holiday in
Namibia.

1) Indicate where (place) the contract between Amy and Chase was concluded by stating the place of
the conclusion of the contract.

From the class notes:

In South Africa information theory is applicable. This means that the contract is concluded when and where the
offeror gains knowledge about the offeree’s acceptance of the contract. The actual time and place where the offeror
gains knowledge of the acceptance of the offer by the offeree are extremely important. They determine when and
where the contract is concluded. Example: A, the offeree sends his messenger B to take the accepted contract to
C the offeror in Cape Town. B deliverers the contract to C on the 10 of April 21 and C sees that the contract is
signed by A. The contract is concluded on the 10 of April 21 at Cape Town.

From the textbook:

Where only the acceptance is made by data message (for example, e-mail, text message or SMS (short message
service), WhatsApp, via websites or interactive television) the Electronic Communications and Transactions Act
25 of 2002 provides that the contract is concluded where the complete data message containing the acceptance
enters the information system that serves the offeror (as the addressee of the message) and is capable of being
retrieved and processed. Whether the offeror is actually informed of the contents of the message is irrelevant.
Where the acceptance is sent by WhatsApp, it means that two ticks are required, yet no blue ticks. In terms of this
Act the place of conclusion of such a contract is not the place where the message is received, but the offeror’s
usual place of business or residence.

Answer: Pretoria, as the acceptance of the counteroffer made by Amy was accepted by Chase via
WhatsApp and Amy’s usual place of business and residence is Pretoria.

2) Indicate when (date) the contract between Amy and Chase was concluded by stating the date of
the conclusion of the contract.

Answer: 16 January, when the message wherein Chase informed Amy of his acceptance of her
counteroffer via WhatsApp enters Amy’s phone.
3) Substantiate your answers in 1 and 2 by referring to the applicable theory or law.

Answer: The information theory is applied as the general rule in South African law. Therefore, as a
rule, the contract is concluded when and where the offeror is actually informed that his/her offer has
been accepted. Based on the fact that Chase made the original offer to sell the iPad to Amy at a charge
of R15 000 and Amy then made the counteroffer to purchase the iPad for R15 000, provided that Chase
pays for the courier charges, the contract is concluded when Chase accepts this counteroffer and informs
Amy of his acceptance. Where only the acceptance is made by data message (such as e-mail, text
message or WhatsApp) the Electronic Communications and Transactions Act 25 of 2002 provides that
the contract is concluded where the complete data message containing the acceptance enters the
information system that serves the offeror (as the addressee of the message, in this case, Amy) and is
capable of being retrieved and processed. Whether the offeror (Amy) is actually informed of the
contents of the message is irrelevant. Where the acceptance is sent by WhatsApp, it means that two
ticks are required, yet no blue ticks. In terms of this Act the place of conclusion of such a contract is
not the place where the message is received, but the offeror’s usual place of business or residence.
Seeing that Chase informed Amy of his acceptance of her counteroffer via WhatsApp, the time and
place of the conclusion of the contract would be Amy’s usual place of business or residence at the
moment the message entered the information system that serves Amy (two ticks). Therefore, the
contract is concluded in Pretoria (Amy’s usual place of business and residence) on 16 January when
Amy’s phone received the message from Chase.

4) Accept now that Amy purchased the iPad because she thought she would be travelling a lot for her
new job. It turned out that her new job required her to be mostly deskbound. Amy notified Chase
that he must collect the iPad and refund her purchase price, as she was not using the iPad as much
as she thought she would and therefore their contract was void. Explain whether Amy's argument
argument is valid.

From the class notes:

Error in motive is an error or false impression about the reason why one is entering into a contract. For example:
Bettie buys a new motor bike from Suzan because she is under the impression that her motor bike is beyond repair.
The error in motive does not affect the validity of the contract. The contract is valid.

Answer: The fact that Amy was under the impression that she would often need to use the iPad due to
anticipated travelling in her new job, whereas it turned out not to be the case, since she is mainly
deskbound, can be seen as an error in motive. An error in motive is an error or false impression about
the reason why one is entering into a contract. Amy entered into the contract with Chase under the false
impression that she would often make use of the contract. The fact that this was in error in motive does
not affect the validity of the contract. Amy’s argument is therefore not valid.
Online Test 1

Question 1
Choose the most correct option: It is vital for the creation of a contract ____
a) None of the given options is correct.
b) that the party making the offer also made it in general.
c) that the parties do not necessarily have to agree on each part of the contract.
d) that the party making the offer must know of the acceptance in writing.
e) that the party making the offer must know that the offer has been accepted.

Question 2
Complete the following sentence: Consensus as a requirement for the conclusion of a contract entails that:
a) Both parties should have the intention to create a natural commitment with undeterminable legal
consequences if they agree on the purpose and content of the contract.
b) At least one party must intend to create a particular legal commitment with particular legal consequences
if they agree on the content of the contract.
c) Both parties should have the intention to create a certain legal commitment with particular legal
consequences if they agree on the purpose and content of the contract.
d) At least one party should have the intention to create a particular legal commitment with certain legal
consequences, while not necessarily agreeing on the purpose and content of the contract.
e) Both parties should have the intention to create a particular legal commitment with certain legal
consequences, while they do not necessarily agree on the purpose and content of the contract.

Question 3
Maggy and Susan are married in community of property and own two fridges, which are both still in a good
condition. One of these fridges has been kept in storage for the past year. On 1 May 2017, Maggy met their new
neighbour named Peter, who was in serious need of a fridge at the time. Maggy decided to donate one of their
fridges to Peter without discussing it with Susan first. The following day, Susan met with Peter at his house and
recognised the fridge in Peter’s house. Susan is of the opinion that Maggy’s donation to Peter is void. Is Susan’s
viewpoint true or false?

a) False, the rules applicable to contractual capacity of spouses married in community of property do not apply to same-
sex marriages.
b) True, when a spouse married in community of property alienates the furniture of the joint estate, the acting spouse
is required to obtain written consent from the other non-acting spouse.
c) True, when a spouse married in community of property alienates the furniture of the joint estate, the acting spouse
is required to obtain consent from the other non-acting spouse, but such consent does not have to comply with any
formalities.
d) False, Susan must have noticed that the fridge was no longer in their storage room and therefore she tacitly consented
to the donation.
e) True, when a spouse married in community of property alienates the furniture of the joint estate, the acting spouse
is required to obtain written consent attested by two witnesses from the other non-acting spouse.
Question 6
Shelly intends to attend an auction but does not know who makes an offer and acceptance in an auction
‘with reserve’. Explain the position to her by choosing the correct option: In an auction ‘with reserve’
the auctioneer merely invites bidders to
a) tender.
b) None of the mentioned options.
c) render their acceptance.
d) make an offer.
e) make a counter-offer.

Question 7
France intends to conclude a contract with Portia a famous dancer to provide dance lessons. When
concluding the contract with Portia, France is of the view that Portia’s name is Getty. The contract
between France and Portia is (choose the correct option):
a) Valid as it is error based on the identity of the party to the contract.
b) Invalid based on the reliance theory.
c) Valid as it is error based on the party to the contract.
d) Voidable as it is error based on the nature of the contract.
e) Valid as it is error based on performance.

Question 10
Cassie is 16 years old and sold her bedroom furniture to Jane for R15 000, while her parents were on
vacation in Europe. Cassie has not yet delivered the furniture to Jane and Jane has not yet paid Cassie.
Is Cassie entitled to claim payment from Jane? Choose the correct option.
a) Yes, Cassie may claim payment from Jane if she ratifies the contract after turning 18.
b) Yes, Cassie may claim payment from Jane once her parents ratify the agreement.
c) All of the mentioned options.
d) None of the mentioned options.
e) No, as Cassie is a minor and neither she nor Jane have performed.
Question 13
Maddie entered into a contract with Chase in respect of which she leased a townhouse with a yard from him. At
the back of the yard, there was a wendy house that Maddie cleaned and where her daughter played with her dolls.
Initially, Chase did not mind because he had given Maddie the keys to the wendy house when he gave her the
keys to the townhouse. However, Chase later changed his mind because he wanted to use the wendy house as a
garden shed to keep his tools. He confronted Maddie and indicated that she was only entitled to the townhouse as
the lease agreement only referred to the townhouse. Under these circumstance, the following is true (choose the
correct option):
a) Maddie and Chase did not agree that Maddie could use the wendy house when Chase gave Maddie the
keys to the wendy house and she used the wendy house. They did not reach actual consensus regarding
the use of the wendy house because there is no law that states that small buildings in the yard of leased
premises may be used without permission. They could thus not rely on the naturalia of the lease
agreement.
b) Maddie and Chase tacitly agreed that Maddie could use the wendy house when Chase gave Maddie the
keys to the wendy house and she used the wendy house. Through their conduct they reached actual
consensus regarding the use of the wendy house.
c) Maddie and Chase did not agree that Maddie could use the wendy house when Chase gave Maddie the
keys to the wendy house and she used the wendy house. They did not reach actual consensus regarding
the use of the wendy house because they never talked about the use of the wendy house.
d) Maddie and Chase agreed by operation of law that Maddie could use the wendy house when Chase gave
Maddie the keys to the wendy house and she used the wendy house. They each tacit consensus regarding
the use of the wendy house.
e) Maddie and Chase verbally agreed that Maddie could use the wendy house when Chase gave Maddie the
keys to the wendy house and she used the wendy house. Through words they reached actual consensus
regarding the use of the wendy house.

Question 14
Casey and Adam entered into a contract in terms of which Casey paid Adam R10 000 each month and in return,
Adam allowed Casey the use of his office space in Johannesburg, from where Casey ran his own business. Casey
was given the opportunity to open a new business in Cape Town. He did not want to continue paying the R10 000
to Adam each month but also did not want to terminate the contract and leave Adam without the additional income.
Casey was aware of another young entrepreneur who needed an office and who was prepared to lease the office
space on the same terms as the existing contract. Which of the following statements correctly indicate the legal
solution to this dilemma?
a) Adam, Casey and the young entrepreneur can enter into a delegation agreement to transfer the rights and
duties that existed between Adam and Casey in terms of the lease agreement, to Adam and the young
entrepreneur.
 b) Adam, Casey and the young entrepreneur can enter into a cession agreement to transfer the rights and
duties that existed between Adam and Casey in terms of the lease agreement, to Adam and the young
entrepreneur.
c) Adam, Casey and the young entrepreneur can enter into an assignment agreement to transfer the rights
and duties that existed between Adam and Casey in terms of the lease agreement, to Adam and the young
entrepreneur.
d) Adam and the young entrepreneur can enter into an assignment agreement to transfer the rights and duties
that existed between Adam and Casey in terms of the lease agreement, to Adam and the young
entrepreneur.
e) Adam and the young entrepreneur can enter into a new agreement that has the same provisions as the
contract between Adam and Casey.

Question 15
Joe, who is 17 years old, wants to conclude a contract with Zak, who is 23 years old. In the contract Joe
offers to sell his green car to Zak for R 20 000 and Zak accepts the offer. However, while negotiating
with Zak, it appears that Joe is under the influence of drugs and as result he is not able to speak and
point to the car that he intends to sell to Zak. With reference to the facts, the contract between Joe and
Zak is (choose the correct option):

a) Null and void because Joe is a mental health care user.

b) Null and void because Joe is a prodigal.
c) Null and void because Joe has limited contractual capacity.
d) Null and void because the contract is ultra vires.
e) Null and void because Joe is under the influence of drugs.
Tutorial (14/04/2021)

Question 1
Zac is a motor bike mechanic and also sells motor bikes at affordable prices. Sizwe’s motor bike is
involved in an accident and he takes it to Zac to fix it. In attempt to get Sizwe to buy a new motor bike,
Zac falsely informs Sizwe that his motor bike is beyond repair. Sizwe buys a new motor bike from Zac
and later finds out that his motor bike was not beyond repair. Is the contract between between Zac and
Siswe valid? (5)

Own answer:

By informing Sizwe that his bike is beyond repair, while this is not the case, Zac acted in a manner that
is identified as fraudulent misrepresentation. A misrepresentation is a false statement of fact (made
expressly or by conduct), that induces the innocent party to enter into a contract. Fraudulent
misrepresentation is false statement (in this case the statement that Sizwe’s bike is beyond repair) that
is made deliberately. Due to the fraudulent misrepresentation, the contract is voidable, but not void.
Sizwe (as the party who suffered damages as a result of the fraudulent misrepresentation) can, however,
claim for damages in terms of delict. The contract is therefore valid, but voidable, as Sizwe can claim
for damages in terms of delict.

Memo:

Identification of the problem:

Here the problem is fraudulent misrepresentation as Zac wants to get Sizwe to purchase the new motor
bike.

Theory of the applicable rule or principle

Misrepresentation is the false representation of facts that sways or influence innocent parties to conclude
contracts. Contracts that are concluded on the bases of misrepresentation are valid but voidable. This
means that although the contract is valid, the party who would suffer damages in the contract can decide
to declare the contract void or invalid.

Application of the theory or the rule

Here Zac has fraudulently/falsely misrepresented that Sizwe’s bike is beyond repair as he wanted to get
Sizwe to purchase the new motor bike. This contract is valid but is voidable at Sizwe’s wishes as he has
suffered damages.

Conclusion

The contract is valid but voidable.

Question 2
Jane, a 17 year old, approaches Busi who makes and sells expensive dresses. Jane concludes a contract
with Busi to make her a dress that is worth R 25 000. Busi makes the dress and when she is about to
deliver the dress, she discovers that Jane is a minor. When Jane approached Busi, she created an
impression that she is 25 years old. Is the contract between Busi and Jane valid? (5)

Textbook:

It is possible for a minor to be bound to the certain contracts concluded without the consent or assistance
of the minor’s parents or guardian, for example if the minor pretends to be a major. Where a minor
fraudulently creates the impression that he/she is a major, he/she is bound by his/her actions as if he/she
had already attained majority at the time such actions were performed. He/she is bound to the contract
even if it is to his/her detriment, and he/she is not entitled to restitution.

Own answer:

The problem in this situation is that Jane, at the age of 17 is still a minor, but represented herself as a
major in order to conclude a contract with Busi. In general, minors can conclude contracts with the help
of the others and help is meant to aid the limited contractual capacity. However, minors can be bound
to the certain contracts concluded without the consent or assistance of the minor’s parents or guardian,
including the case wherein a minor pretends to be a major. When a minor fraudulently creates the
impression that he/she is a major, he/she is bound by his/her actions as if he/she had already attained
majority at the time such actions were performed. He/she is bound to the contract even if it is to his/her
detriment, and he/she is not entitled to restitution. Therefore, since Jane fraudulently created the
impression that she is a major, she is bound by her actions as if she has already attained majority. The
contract between Jane and Busi is therefore valid.

Memo:

Problem: Here the minor created an impression that she is a major.

Rule: Generally contracts concluded with minors without assistance of their guardians are null and void
(invalid). This means that minors are generally not bound by the contracts concluded. However, the
exception is that where the minor created an impression that she is a major then the contract will be
valid.

Application: Here Jane who is a minor created an impression that she is a major. Busi concluded the
contract on the bases of the impression made by Jane.

Conclusion: The contract is valid.

Question 3
Deep Gold mine has advertised a mining manager’s position. The advertisement states that women will
not be considered for the position as the job requires the incumbents to carry heavy tools and do work
that is physically demanding. Is this advertisement valid? (5)

Please attempt this question on your own using IRAC method as applied in question 1 and 2.

Answer:

The problem with the advertisement is that it discriminates on the basis of gender, as women are not
considered for the position. In accordance with Chapter 2 of the Constitution of the Republic of South
Africa, 1996 under section 9, subsection 4, discrimination (either directly or indirectly) on the basis of
gender is unconstitutional. The advertisement can therefore be seen as unconstitutional on the basis of
direct discrimination based on gender and will not be valid.
 THEME 3: LAW OF PURCHASE AND SALE

SU 1: The creation of the contract

Learning material
1. Business Law chapter 8
Learning objectives
At the conclusion of this study unit, you should be able to demonstrate your knowledge and
understanding of the contract of purchase and sale through your ability to:

1. explain the common law origins of the contract of purchase and sale;
2. define, and analyse the definition of, a contract of purchase and sale comprehensively;
3. list, and identify, the general requirements for the conclusion of a valid contract of purchase and
sale;
4. list, identify, and explain the requirements for a valid contract of purchase and sale as it relates to
the essentialia of this type of specific contract and with specific reference to:
4.1 the nature of a contract of purchase and sale;
4.2 the thing sold and the various saleable objects; and
4.3 the purchase price;
5. Explain the general rules regarding formalities;
6. Generally discuss the application and implications of the Alienation of Land Act to contracts of
purchase and sale, with specific reference to:
6.1 the formality requirements set forth by the Alienation of Land Act for contracts of sale of land;
6.2 the key concepts relating to formalities contained in the Alienation of Land Act; and
6.3 the aims of these requirements and formalities;
7. Specifically explain the formality requirements with reference to:
7.1 writing as a formality, specifically in relation to the property, purchase price, parties to the
contract, amendment and termination of the contract;
7.2 the signatures of the parties;
7.3 the requirements of the Act where a person acts as an agent on behalf of a purchaser or seller
of land; and
7.4 the consequences of non-compliance with the requirements regarding formalities;
8. Discuss the right to cooling-off in respect of certain contracts for the sale of land;
9. Discuss the influence of the Consumer Protection Act, 68 of 2008 on the thing sold, purchase price,
cooling-off and formalities.
10. Apply the abovementioned principles/law to relevant but unfamiliar scenarios to solve practical
problems.

Practice question: can you identify the mistakes and omissions in this contract?
Introduction
 Contract of sale originates from the Roman law contract of exchange or barter.
 E.g In a contract of barter or exchange B agrees to deliver his crops to A from his farm and in
exchange A agrees to deliver 5 cows to B.
 You will realise that in this contract there is only exchange of goods.
 In some instances goods were exchanged with services.
 This contract was then developed and improved in the Roman Dutch law.
 All the law that applied to this contract, apply to the current contract of sale in South Africa.
 Thus, South African law of sale is based on common law.
 In this study unit we are going to look at this particular contract.

Definition of the Contract of Sale

The contract of sale is a specific, nominated, reciprocal agreement to buy and sell, in terms of which
the seller has the true intention to deliver a determined or determinable thing together with all his/her
rights in the thing undisturbed to the buyer, and the buyer has the true intention of paying a determined
or determinable price for the thing.

❖ Contract of sale is a specific and mutual contract to sell and buy.

❖ The seller undertakes to deliver a fixed or ascertainable thing to the buyer and all his rights or
entitlements for the buyer to enjoy exclusively and the buyer undertakes to pay a fixed or
ascertainable price for the thing.
❖ e.g. A concludes a contract with B. In the contract A undertakes to sell and deliver his blue BMW
3 Series, registration number ABC 567 GP, 2017 model to B for R 197 000 and B undertakes to
pay an amount of R 197 000 to A for the sale and delivery of the car to him.

Requirements of the contract

▪ All the general requirements of the contract must be complied with before the contract can be
valid.
- Consensus
- Contractual capacity
- Legality
- Physical possibility
- Formalities
▪ In addition to the general requirements, all the essentialia or characteristics that distinguish the
contract of sale from other contracts must be present in the contract for it to be valid.
▪ This means that the seller and the buyer must reach agreement or consensus with regards to all the
essentialia or characteristics of the contract, they are:
→ The undertaking, intention or will of the seller to sell and the buyer to buy. (Nature of the contract)
→ The seller and the buyer must agree on the thing to be sold.
→ The seller and the buyer must agree on the price to paid (purchase price).
▪ e.g. A concludes a contract with B. In the contract A undertakes to sell and deliver his blue BMW
3 Series, registration number ABC 567 GP, 2017 model to B for R 197 000 and B undertakes to
pay an amount of R 197 000 to A as the purchase price of the car.
▪ In the example it is clear that the parties are in agreement with regards to their:
→ Intention to sell and buy
→ The car to be sold.
→ The price to be paid for the car.
▪ The seller need not be the owner of the thing to be sold and bought.
▪ However, a contract where ownership is not transferred will not be a contract of sale as transfer of
ownership is a characteristic of the contract of sale.
▪ However, the seller must undertake to transfer all the rights to the buyer to enjoy exclusively
without hindrance.
▪ The conclusion of the contract of sale does not transfer ownership but grants the buyer a personal
right against the seller to deliver the item.
▪ And the seller is then obliged to transfer ownership.
▪ Delivery of the thing and payment of the price still have to take place before ownership is
transferred.
▪ Let’s go deeper to the essentialia of the contract of sale.

Essentialia of the contract of sale

The nature of the contract, the thing sold and the purchase price

Nature of Contract
The intention of the parties to a contract of sale is to enable the buyer to obtain ownership of the thing
sold.

e.g A concludes a contract with B. In the contract A undertakes to sell and deliver his blue BMW 3
Series, registration number ABC 567 GP, 2017 model to B for R 197 000 and B undertakes to pay an
amount of R 197 000 to A as the purchase price of the car. Let’s use the example to explain the legal
requirements that apply to the contract of sale.

 A and B must reach agreement that A is selling the car and B is buying the car.
 A and B must reach the agreement that A is selling the specific car provided in the example and B
is buying the car.
 A and B must reach the agreement that A selling the car for R 197 000 and B is paying R 197 000
for the car.
 A and B must agree that A is transferring all his rights to the car to B for B to use exclusively
without hindrance.
 A and B must agree that A is disposing or transferring the right of ownership of the car to B. If A
does not own the car, there will be a contract of sale.
 E.g A wants to sell a car he bought from C not knowing that C stole the car from D.
 The contract will be valid and B will have undisturbed use of the car until it is claimed from him
by D and then he can sue A.

There must be consensus with regards to the intentions of the parties. Where they are creating an
impression that the contract is the contract of donation whereas they intend to create the contract of
sale, the court will give effect to the latter.

The Thing Sold

 The parties must agree on the following:
 The thing sold must be determinable (ascertainable) or determined (fixed) when the contract is
concluded (physical possibility requirement) and must have a commercial value (must be
merchantable).
- The car and the price in the example.
 It can be movable or immovable.
 It can be material or immaterial
 The law must allow for the thing to be sold.
- E.g. no land can be sold in the township without the approval of the township.

Different things that can be sold:

The thing sold can be sectional property, time share property, future things, res aliena and res litigiosa

 Sectional property
- This is regulated by the Sectional Titles Act 95 of 1986.
- This provides that the owner of a unit in a joint property has the exclusive right to enjoy the
demarcated area.
- The thing consists of a unit and joint ownership in the common property
- This can be sold by the owner of the unit.
 Time share property
- This is regulated by Timeshare Control Act 75 of 1983.
- Here owners of timeshare units have the right to use the demarcated area for a particular period
or schedule.
- They do not have the real right (ownership) but personal right to use the demarcated area.
 Future things
- The things are determinable at the conclusion of the contract in terms of specifications or
occurrence of certain events.
- These things only become determined when specifications or certain events occur.
o Emptio rei speratae
▪ B sells his sand that he will collect from the river bank for R30 per wheel barrow to A.
▪ Here the thing sold is determinable when the contract is concluded and determined when B successfully
collects sand from the river on Friday and it is determined or fixed at R30 per wheel barrow. OR
o Emptio spei
▪ B sells his entire sand that he will collect on Friday to A for R 1500 irrespective of whether B successfully
collects the sand or not. The thing sold is determined as soon as the contract is concluded.
o Generic sale
▪ E.g Where A buys 10 bags of potatoes from B’s Veg Market.
▪ Here the thing sold is determinable when contract is concluded and fixed or determined when
the individualisation or separation takes place.
▪ Before individualisation, the thing is just the physical and psychological thing.
o The application and influence of Consumer Protection Act 68 of 2008(‘CPA’) in the sale of
future things
▪ The future thing sold by description or sample by the seller must materially correspond to the
thing delivered to the buyer.
▪ The buyer has the right to inspect the thing.
▪ The buyer can return the thing if it does not correspond to the description (within 10 business
days)
▪ The risk and expense of returning the goods is that of the seller.
 Res aliena
- Buyers who act in good faith:
o e.g A concludes a contract with B for B to use his car for a month.
o B concludes a contract of sale with C and delivers the car to C and C pays the price.
o The thing sold here is res aliena, a thing sold by a person who is not the owner.
o Because of nemo plus iuris rule which means no one can transfer rights that he does not have, A can claim the
car from C with rei vindicatio.
o This is despite the fact that C bought the car in good faith not knowing that B is not the owner.
o If C in good faith sells the car to D, A cannot claim the value of the car from C but can claim the car from D
with rei vindicatio.
o If D intentionally or negligently destroys the car, A can claim the value of the car from D.
- Buyers who act bad faith
o If C buys the car from B and acts in bad faith, then A can claim the car or the value of the car from such a
buyer and all other subsequent buyers who act in bad faith.
o Instances where the owner cannot use Rei vindicatio
o e.g A concludes a contract with B for B to use his car for a month.
o B concludes a contract of sale with C and delivers the car to C and C pays the price.
 - Let’s use this example to explain the law here:
o Where A misrepresented that B is the owner of the car, then A will in terms of Estoppel be prevented from
relying on the truth that B is not the owner of the car.
o The car was sold in terms of order of court and C acted in good faith. E.g B obtained a judgment against A.
o An object which without knowledge of the curator does not belong to the insolvent estate is sold to a buyer
who acts in good faith.
o The buyer has a lien or tacit hypotec to the goods of the tenant that are in his property. (real right to the property
of the tenant as security)
o Where the owner instructs the agent (factor) to sell his property and the factor keeps the money for himself.
The buyer who acted in good faith can only return the property if he is paid back his purchase price.
- If the CPA is applicable,
o The buyer is entitled to assume and it is an implied term that the seller has the right to transfer ownership or
transfer the rights he is transferring.
o The supplier is liable for all the debts that are outstanding in the property or goods if they have not been
disclosed in writing or where the supplier and the consumer have defrauded the third party.
 Res litigiosa doctrine
- Where a second sale occurs pending litigation, the rights of the first purchaser must prevail and
are enforceable against the second purchaser.
- Merx becomes a res litigiosa once summons is served.
- e.g. A concludes a contract of sale of the car with B. B pays and A refuses to deliver. B institutes
an action in court against A to deliver. A after receiving summons sells the car to C. The car is
res litigiosa
o This is a principle that says where the second sale of a thing takes place pending litigation; the rights
of B prevail over the rights of C.
o The first purchaser B can claim from the second buyer C.
o The second buyer C is bound by the judgment.
o It does not matter whether C acted in good faith or bad faith.
o It does not matter whether C knew or was not aware of the summons.

The Purchase Price

 The seller and the buyer must reach agreement on
→ Price
→ Price must be certain
→ Price must be paid in terms of the acceptable currency.
→ Money must be used otherwise no contract of sale as money (price) is one of the essentialia.
→ Letter of agreement is used in international trade. (terms of sale)
 e.g. Where A sells his car to B and B pays money and transfers his motor bike to A as purchase
price. Is this contract of sale or exchange?
→ Intention of the parties will determine the nature of contract.
→ If uncertain from the intention, then when the value of the money is higher than the bike, it is
contract of sale. If the value of bike is more than money then it the contract of exchange.
→ If value of money and bike are equal, then presumption is that parties want to conclude a
contract of sale instead of exchange.

Agreement on the price

 The price must be determinable or determined.
 The parties must agree that the agreed price is the price of the goods in the contract and will be
paid as agreed.
 The price must be proportional to the good.
 Bargains are allowed, but if the price and the value of the thing are disproportionate, then there is
no contract.
 Where price is determinable the method of determining the price must be effective and valid to
prevent the contract from void.
 Study the valid, effective and non-effective methods of determining prices in the textbook.

Textbook:
Where the price is only determinable (and not determined), the method of determination must be valid and
effective to prevent the contract from being null and void. Valid methods of price fixing are, for example, where
the price is fixed as a lump sum (R125) or where the price is determined per unit (R120 per bag) or where an
objective measure is used (purchase price plus 30%). Ineffective methods are, for example, where one of the
parties fixes the price unilaterally, where an unnamed third party is to determine the price, or where the price is
described as “reasonable and fair” only. Where a third person makes a reasonable determination, the parties are
bound thereby. Where the determination is unreasonable, a court can correct the determination. In the event of
such a correction, the other party should be given a choice as to whether to abide by the agreement or not. Where
there is a current or usual price for the object sold (for example, bread), the selling price may be the “current or
usual selling price”.

Influence of the CPA in the determining the price:

→ The supplier is prohibited from selling or marketing to the consumer at unjust, unfair and
unreasonable prices.
→ If the supplier does that, the court can order a just and reasonable order.
→ The court can order the return of money to the consumer.
→ The supplier must display the price and cannot charge higher than the displayed price.
→ If there is an error in display, then the supplier is not bound.
→ The supplier is not bound to display prices in goods that are not easily accessible to consumer.
Formalities
❖ Formalities refer to the external or extrinsic form that a contract should take.
❖ E.g. contract in writing or signed by two witnesses.
❖ Common law requires no formalities.
❖ Two different situations exist:
o Where contract should be in writing before it can be valid.
o Where written contract serve as evidence that a contract exist.
❖ Some contracts which involve sale of immovables should be in writing.
❖ And some legislation requires contracts to be in writing and the parties cannot decide or agree
otherwise.

Contracts for the sale of land

 Section 2 of the Alienation of Land Act 68 of 1981 provides that no land shall be transferred
without the written contracts (deed of alienation) signed by the parties or their agents acting under
their written authority.
 “No alienation of land after the commencement of this section shall, subject to the provisions of
section 28, be of any force or effect unless it is contained in a deed of alienation signed by the
parties thereto or by their agents acting on their written authority”
 Circumstances where the agent’s written authority from principal is excluded:
 In circumstances where the agent is acting on behalf of company that is not yet incorporated.
(pre-incorporation contract)
 Partner acts on behalf of partnership.
 Where the law allows a person to act on behalf of another. E.g guardian acting for the minor.
 Where directors act on behalf of companies or functionaries acting on behalf of entities.
 In public auctions, no formalities are required. As soon the hammer is hit to the highest bidder, the
contract is accepted. The contract is concluded.

Important terms
➔ Alienate (note the meaning in the textbook) sale, exchange and donation.

Textbook:
“Alienate” means to sell, exchange or donate irrespective of the fact that it is subject to a suspensive
or resolutive condition, and “alienation” has a corresponding meaning.

➔ Land (note the meaning in the textbook) Interest in the land:

 Habitatio: right to dwell
 Usus: right to use without changing the form of the property
 Usufructus: right to use and collect fruits without changing the form of the property.
Textbook:
“Land” includes the following:
(i) any unit (thus the same requirements have to be met where sectional property is sold);
(ii) any right to claim transfer of land;
(iii) any undivided share in land; and
(iv) for the purposes of Chapters I and II of the Act, any interest in land, except a right or interest
registered or which can be registered in terms of the Registration of Mining Titles Act 1967. An interest
in land will, inter alia, include a habitatio, usus and usufructus. There is a tendency to interpret this
aspect of the definition restrictively, so as to exclude agreements envisaging the acquisition of indirect
interests in land.

➔ Deed of alienation: documents pertaining to the alienation of land and is wider than contract.

The same requirements must be complied with in terms of Shareblocks Control Act 59 of 1980,
Timeshare Control 75 of 1983 and Housing Development Schemes for Retired Persons 65 of 1988.

Section 5 of the General law amendment Act provides that no donation of land will be invalid because
it is not notorially executed or registered unless written and signed by the donor or his agent with his
written authority in the presence of two witnesses.

The aim of the aforementioned statutory requirements is to:

 Prevent disputes with respect to the contents of the contract.
 Prevent uncertainties
 Prevent malpractices or fraud or abuses.

Written contract required

• A contract will usually comprise of one document.
• But numerous documents may contain one contract.
• In such contracts, the parol evidence rule is applicable which means that external oral evidence (verbal
testimony) cannot be provided to support, change or contradict the contract.
• However, where the written contract fails to provide the true undertakings (intentions) of the parties,
then oral evidence (verbal testimony) can be provided.
• The deed of alienation must have all the essentailia and other terms that parties regard as material.
• Material terms are terms to which parties applied their minds and which parties agreed that they should
form part of their contracts and binding on them (parties regard as important enough to insert in the
contract).
• To determine whether a term is material:
- Did the parties apply their minds to the term?
- Did the parties agree (expressly or by implication) that (i) the term should form part of the contract
and (ii) be binding on them?
• These terms are not naturalia only.
• The deed of alienation should contain the right of cooling off or right to rescind in terms of section 29A
of the Alienation Act 68 of 1981 and 16 of the CPA.
• A deed of alienation cannot be concluded by electronic media (e.g. e-mail, Internet or SMS).

The thing sold must be clearly defined

• The thing sold must be clearly defined in terms of the written contract (without parol evidence).
• If the thing sold cannot be identified, the contract in null and void.

Purchase price must be clearly defined

• The purchase price, the method of payment and time of payment must be clearly defined.
• If the price is payable in instalments, the deed of alienation must clearly state the amount of periodic
payments, the periods between payments and the time when payments must be made. If not stated –
contract is null and void.
• Material terms are not restricted to essentialia and include
- Price itself
- Manner of payment
- Time of payment

Parties must be clearly described

• The parties must be clearly defined in the deed of Alienation.
• Both the buyer and the seller must be clearly identifiable.
• If other parties are involved, their capacities must be clearly described.

Alteration of written contracts

• Any changes made in the written contracts must comply with all the requirements (statutory formalities)
of the contract.
• If not complied with – contract is null and void.

Termination and re-instatement of written contracts

• The termination or reinstatement must not comply with the requirements of the contract.
• They can be done verbally.

Signature of parties
 Both parties must sign the deed of alienation.
 Even their representative may sign on their behalf provided they act with their written authority
 If a contract is contained in more than 1 document, both documents must be signed.
 Although the CPA and the Electronic Communications and Transactions Act 25 of 2002 provides
for electronic signatures, the deed of alienation for land cannot be signed electronically.
Agents
▪ An agent can represent the seller or the buyer provided there is written authority from the principal
before the agent can act.
▪ An agent cannot represent a trust that does not exist.
▪ A letter of authority from the Master is required before the trust can conclude a deed of alienation
of land.
▪ Companies and the deed of alienation:
- In companies your find organs of companies which are known as the board of directors.
- You also find individuals who have the delegated authority from the directors. (E.g Managing
directors)
- Directors are given all the powers to execute the affairs of the company subject to the Act,
Memorandum of incorporation and rules of the board. (Section 66 of the Companies Act 71 of
2008)
- Directors are not agents and thus can conclude the deed of alienation of land on behalf of
companies without written authority.
- Individuals who have delegated authority are agents and need written authority before they can
conclude a deed of alienation of land.
- If the CPA is applicable an agent who is an intermediary should disclose all the information to
the person he represents as per the regulation by the Minister of trade and industry. See the
information that should be disclosed by the intermediary in the textbook.

Textbook:
If the Consumer Protection Act 68 of 2008 is applicable [see 40.14 – 40.18] and an agent falls within the definition
of an “intermediary” [see 40.62], he/she must disclose (and put in safekeeping) the information prescribed by the
Minister of Trade and Industry [section 27(3)] to any person whom he/she represents regarding the sale or supply
of any property, goods or services. Information to be disclosed is, inter alia, full identification, services to be
rendered, fees, commission and costs payable, disclosure of any code of conduct which may be relevant and the
revealing of dishonest or criminal behaviour.

Influence of CPA in the formalities

 The CPA and the Alienation of Land Act are in conflict with one another when it comes to
formalities.
 The latter requires the deed to be in writing and the former does not.
 Where the CPA does require any contract to be in writing the contract must be in plain and
understandable language.
 In case of conflict, the Acts should apply concurrently (alongside) and if not possible, the Act that
provides more protection should be applied.
Consequences of non-compliance with formalities prescribed by Alienation of Land Act
➢ Section 2 of the Alienation of Land Act 68 of 1981 provides that if the alienation of land is not in
effected in terms of the deed of alienation signed by both parties or their agents acting with the
written authority, the alienation is void.
➢ And if the deed of alienation does not contain the right of the purchaser to revoke the contract
(cooling off right), the deed of alienation is void.
➢ Section 28 of the Alienation of Land Act provides the consequences of alienation that does not
comply with the requirements as provided in section 2).
➢ See the consequences of non-compliance in the textbook and note that the consequences are aimed
ensuring fairness to the buyer and the seller.
➢ And note that where the buyer and the seller have performed in full, the contract will be regarded
as valid from the time of conclusion.
➢ The same consequences are applicable to the alienation of land that took place before the coming
into effect of the Alienation of Land Act 68 of 1981.

Right to revoke/cancel/walk away from the contract

➔ Section 29A of the Alienation of Land Act 68 of 1981 provides that the purchaser of an immovable
property has the right to walk away/cancel the deed of alienation with 5 days after signature with
a written notice provided:
- The property is worth not more R 250 000,
- The buyer is a natural person, and
- The land is used for residential purposes.
➔ Any person who received the purchase price from the purchaser must refund the purchaser within
10 days after delivery of notice to the seller.
➔ The CPA if applicable provides that purchaser may cancel the contract and return the goods
provided within 5 days after delivery, if the goods were delivered because of direct marking.
➔ The seller must return the money paid within 15 days after cancellation.
➔ The purchaser bears the costs of returning the goods and the risk
SU 2.1: Duties of the seller and Duty of safe keeping

Learning material
1. Business Law chapter 9 paragraphs 9.03 – 9.12

Learning objectives
At the conclusion of this study unit, you should be able to demonstrate your knowledge and
understanding of the duty of safekeeping of the seller through your ability to:

1. explain the seller’s duty of safekeeping (custody) of the thing sold;

2. explain the factors that influence this duty;
3. explain the doctrine relating to the passing of risk;
4. distinguish passing of risk from the duty of safekeeping;
5. discuss the concepts damages and advantage;
6. discuss the influence of the Consumer Protection Act 68 of 2008 on risk;
7. apply the abovementioned principles/law to relevant but unfamiliar scenarios to solve practical
problems.

Duties of the Seller

◆ e.g A concludes a contract with B. In the contract A undertakes to sell and deliver his blue BMW
3 Series, registration number ABC 567 GP, 2017 model to B for R 197 000 and B undertakes to
pay an amount of R 197 000 to A as the purchase price of the car.
◆ Where parties conclude a contract of this nature, they will have duties to fulfil.
◆ The following duties of the seller are naturally applicable (naturalia) to the contract of sale:
- Duty to keep safe the thing sold.
- Delivery of the thing.
- Warranties against eviction or latent defects

The duties of the buyer will be discussed later.

General Rule of the Duty of Safe Keeping

 e.g. A concludes a contract with B. In the contract A undertakes to sell and deliver his blue BMW
3 Series, registration number ABC 567 GP, 2017 model to B for R 197 000 and B undertakes to
pay an amount of R 197 000 to A as the purchase price of the car.
- A has the duty to take care of the car from the conclusion of the contract until delivery.
- B can claim damages from A, if A intentionally destroys the car or allows the car be destroyed.
In other words, where A directs his will towards destroying the car, B can claim.
- B can claim damages from A if A negligently destroys the car or negligently allows something
bad to happen to the car. In other words, if he fails to act reasonably in protecting the car.
- Vis major (Acts of God or nature) is not relevant in these instances.
- The parties may exclude these duties with incidentialia.
Factors that influence the duty of safe keeping
 Where the seller is in mora debitoris (fails to deliver) he will be liable for damage to the car even
if the damage is not due to his fault.
- Where damage is due to the acts of nature.
 Where the buyer is in mora debitoris or mora creditoris (fails to pay or accept delivery) the seller
will only be liable for damage caused intentionally or due to gross negligence.
- Where damage is due to acts of nature, he will not be liable.
 Mora creditoris (fails to accept the money) of the seller does not affect duty of safe keeping.

Passing of Risk
e.g A concludes a contract with B. In the contract A undertakes to sell and deliver his blue BMW 3
Series, registration number ABC 567 GP, 2017 model to B for R 197 000 and B undertakes to pay an
amount of R 197 000 to A as the purchase price of the car. B pays immediately and the parties agree
that A will deliver the car at the end of the month.

→ The doctrine answers the question as to who bears risk of damage due to acts of nature when the
seller and the buyer conclude the contract but before delivery.
→ The general rule is that the owner (A) bears the risk while in possession of the car. In other words,
prior to transfer of ownership, A bears the risk.
→ However, RISK will pass to B the buyer when the contract is perfecta between A and B.
→ This where A and B have the intention to sell and buy respectively.
→ The thing to be sold (car) is determined. (BMW 3 Series, registration number ABC 567 GP, 2017
model)
→ The price is determined. (R 197 000)
→ The contract is not subject to suspensive condition.
→ This means that in our contract above, B the buyer will bear the risk of damage due to acts of nature
as soon the contract is concluded because the contract is perfecta (complete).
→ The buyer will liable to pay the purchase price of the car even if the car is not yet delivered. Parties
may exclude this naturale by agreement. (Incedentialia)

Textbook:

The doctrine of the passing of risk determines whether the seller or the buyer bears the risk where
accidental damage is caused to the thing either by coincidence or by acts of God, and not by the culpable
conduct of either party.

The general rule is that the owner suffers the loss when his/her property is destroyed. The seller, while
retaining ownership, bears the burden of the total or partial destruction of the thing while it is in his/her
possession, without being able to claim the purchase price from the buyer.
The doctrine of the passing of the risk causes the risk to pass to the buyer where the sale is perfecta. A
contract is perfecta when:

(a) the buyer and the seller have the intention of buying and selling;
(b) the thing to be sold is determined;
(In the case of
(i) an emptio rei speratae, the object sold is fixed after being measured or weighed;
(ii) an emptio spei, the object sold is fixed as soon as the contract is concluded; and
(iii) a generic sale, the object sold is fixed after individualisation.)
(c) the purchase price is determined; and
(d) the contract is not subject to a suspensive condition.

The result is that the buyer bears the risk where the thing is damaged or destroyed through coincidence
or an act of God. The buyer is still liable to pay the purchase price even where the seller has not yet
delivered the thing to him/her. This is a naturale of any contract of sale and the parties may by
agreement exclude or change it.

Damages and advantages

o Damages due to the acts of nature refer to lighting, fires, floods etc. These are damages not due to
the fault of the seller or buyer.
o Advantages on the thing sold pass like the risk. (The principles as applied to the passing of risk
apply to the allocation of benefits.)
- If A sell his 10 chickens to B and after the contract is perfecta(complete), the chickens lay eggs,
then the eggs belong to B. (Accessory accrual or natural accrual)
- If C kills the chickens while they are in A’s possession after the contract is perfecta, then B has
right to claim damages from C. (Substitutive accrual or substitutive advantages)
The Influence of CPA in the Passing of Risk
According to the CPA, the seller or supplier bears the risk of goods to be delivered until they are
delivered unless the consumer (buyer) accepts delivery or does what is deemed to be acceptance of
delivery. See the textbook.

Textbook:

The Consumer Protection Act, if applicable [see 40.14 – 40.18], provides that in the absence of an
express agreement to the contrary, goods to be delivered, remain at the supplier’s (seller’s) risk until
the consumer (purchaser) has accepted delivery [section 19(2)(c)]. Acceptance of delivery is deemed
when a consumer expressly or implicitly communicates to a supplier that he/she has accepted delivery
of such goods, or if a consumer does anything in relation to the goods that is inconsistent with the
supplier’s ownership, or if a consumer keeps the goods for an unreasonable period without informing
the supplier that he/she does not want them [section 19(4)]. These provisions do not apply to franchise
agreements or where the transaction is governed by section 46 of the Electronic Communications and
Transactions Act 25 of 2005.
Practice question:
Lebo sold exotic chocolate. On 1 April 2020, Lebo and Koketso entered into a contract of purchase and
sale in terms of which Koketso bought ten kilograms of chocolate for R5 000. The ten kilograms of
chocolate were all that was left of a shipment of chocolate that Lebo had imported from France in
March 2020. Delivery and payment of the chocolate were scheduled to take place simultaneously on 1
May 2020. On 15 April 2020, a heatwave hit the city of Pretoria. All the chocolate in Lebo’s warehouse
melted because Lebo forgot to turn on the air conditioning when the Weather Service warned everyone
about the heatwave. Your advice to Koketso in this regard would include the following statements
(choose 2 options):

a) Because Lebo was negligent, she failed in her duty of safekeeping.

b) Koketso has a claim against Lebo for damages.
c) Because Lebo was still the owner of the chocolate on 15 April 2020, she cannot claim the
purchase price from Koketso in terms of the common law doctrine of passing of risk.
d) Even though Lebo was still the owner of the chocolate, she can claim the purchase price from
Koketso notwithstanding that the chocolate had been destroyed because the contract was
perfecta when the heatwave occurred.
e) Because the heatwave was vis major, Lebo has not breached her duty of safekeeping and
Koketso therefore does not have a claim against her for damages.
f) Because the heatwave was not vis major, Lebo has not breached her duty of safekeeping and
Koketso therefore does not have a claim against her for damages.
g) Lebo has a common law claim for damages against Koketso.
h) Lebo has a statutory claim for damages against Koketso.
SU 2.2: The duty to transfer all rights in the object, including ownership where
applicable

Learning material

1. Business Law chapter 9 paragraphs 9.13 – 9.39 (leave paragraphs 9.23 – 9.27 as cheques are being
phased out)

Learning objectives
At the conclusion of this study unit, you should be able to demonstrate your knowledge and
understanding of the duty of the seller to transfer ownership through your ability to:

1. explain the scope of this duty, with specific reference to whether the seller needs to be the owner
of the thing sold in order to conclude a valid contract of purchase and sale;
2. distinguish between personal and real rights, and the stage when the purchaser obtains personal
and real rights respectively;
3. state, and differentiate between, the requirements for the passing of ownership in respect of
movable and immovable property respectively;
4. discuss the payment of the purchase price in case of a cash and credit sale;
5. explain and determine when tacit granting of credit occurs;
6. discuss delivery of the thing sold, specifically:
6.1 the forms of delivery in the case of movable and immovable property, corporeal and
incorporeal things;
6.2 the object delivered and consequences where the object is not delivered as agreed;
6.3 the time and place for delivery; and
6.4 the influence of the Consumer Protection Act, 68 of 2008 on delivery;
7. Apply the abovementioned principles/law to relevant but unfamiliar scenarios to solve practical
problems.

Passing of Ownership
e.g A concludes a contract with B. In the contract A undertakes to sell and deliver his blue BMW 3
Series, registration number ABC 567 GP, 2017 model to B for R 197 000 and B undertakes to pay an
amount of R 197 000 to A as the purchase price of the car. B pays immediately and the parties agree
that A will deliver the car at the end of the month. The conclusion of the contract between A and B does
not transfer ownership to B, but a personal right to delivery of the car and the contract will allow B to
have ownership.

Before ownership can be transferred there are requirements that must be complied with:
→ A must be the owner,
→ A must have the intention to transfer ownership of the car and
→ B must have intention to take ownership of the car.
Textbook:

Mere conclusion of a contract of sale does not transfer ownership to the buyer. Other requirements have
to be met before ownership is transferred. On conclusion of the sale, the buyer obtains merely a personal
right (legal claim) against the seller for delivery of the thing sold. The contract enables the buyer merely
to obtain a real right in the thing sold. The real right can exist only if all the requirements, as mentioned,
are met.

Unless the seller is in fact the owner of the thing sold, there is no duty on him/her to transfer ownership
to the buyer, because ownership is not one of the requirements for a valid contract of sale.

Transfer of ownership in immovable property

 The seller must be the owner
 The seller must have an intention to transfer ownership
 Buyer must have the intention to accept ownership
 The property must be registered in the name of the buyer.
 Payment of the purchase is not a requirement.

e.g A concludes a contract with B. In the contract A undertakes to sell and deliver his blue BMW 3
Series, registration number ABC 567 GP, 2017 model to B for R 197 000 and B undertakes to pay an
amount of R 197 000 to A as the purchase price of the car. B pays immediately and the parties agree
that A will deliver the car at the end of the month.
 A must be the owner of the car
 A and B must have the intention to transfer ownership and obtain ownership respectively.
 If it is cash sale, B must pay and A must deliver the car.
 If credit sale, A must just deliver the car to B (A and B can agree that ownership passes upon
payment of the price).

So in our example, ownership will only pass if the aforementioned requirements are complied with and
when A has delivered.

Purchase Price
Cash sales and credit sale have a bearing on the transfer of ownership in movables (real right of
ownership).

Cash sales
 Parties are deemed to be concluding a cash sale if the delivery and payment will take place at the
same time or on the same day.
 However, parties can conclude a credit sale expressly or through conduct.
 A seller in the cash sale can claim back his goods if the buyer fails to pay on delivery or in the
same day or within reasonable time.
 Delivery of the item without simultaneous payment does not indicate credit sale. A seller in the
cash sale can claim back his goods if the buyer fails to pay on delivery or in the same day or within
reasonable time.
 If the seller does not when the buyer is not paying, that can be construed as credit sale.
 The buyer will then receive ownership through delivery.

Credit sales
➢ The general rule is that all sales are cash sales unless parties expressly or tacitly agree that it is
credit sale.
➢ Tacit (by conduct) granting of credit sale: E.g A who specialises in fixing expensive watches, sells
his watch to B and as a security he takes B’s expensive pen.
- A is granting tacit credit sale to B by taking pledge (SECURITY).
- Where A charges interest on the purchase price.
- Where A and B had always concluded credit sales. (It may be gathered/concluded from previous
transactions)
- Where it is customary for the transaction to be on credit.
- Where seller accepts cheques
- Where A does not claim payment immediately and does not claim the watch within reasonable
time even if the parties agreed on cash sale.

Delivery of the thing sold

The requirement of transferring ownership is delivery of the thing sold. This will grant the buyer the
right to:
• Use
• Enjoy and Dispose

Forms of delivery
Corporeal: things we can touch

Incorporeal: things we cannot touch.

Movable incorporeal property

 Movable incorporeal (things we cannot touch) property such as patent rights (intellectual right) is
delivered through cession which is transfer of rights to the invented thing.
 See the other example from the book.
Immovable incorporeal property
Immovable incorporeal right such as servitude (right to enjoy another’s land) is transferred through
registration in terms of in terms of Registration of Deeds Act 47 of 1937.

Immovable corporeal property

Immovable corporeal (things we can touch) (land) ownership delivered (transferred) when ownership
is registered against a person in terms of Registration of Deeds Act 47 of 1937.

Movable corporeal property

◆ Movable corporeal can be delivered in different ways.
◆ Study the explanation of the methods of delivery in the textbook.
- Actual delivery (physical delivery)
- Delivery with short hand (buyer already in possession when contract is concluded)
- Constitututum possessorium (seller continues to possess after contract concluded)
- Attornment (third party possess the item for seller and after contract concluded for the buyer)
- Symbolic delivery (handing of receipt for buying crops)
- Delivery through marking (marking items sold)
- Delivery with the long hand (pointing out)
- Claviam traditio (handing of keys)

Textbook:

(a) Actual delivery (de manu in manum)

In this case the object sold is handed over physically by the seller to the buyer.

(b) Delivery with the short hand (traditio brevi manu)

In this case the buyer is already physically in possession of the object sold and delivery takes place by
the mere change of intention of the buyer and seller. For example, where the buyer, before concluding
the deed of sale, rents a car from the seller and later decides to buy the car. It is not necessary for the
buyer to give the car back to the seller in order to establish delivery. The buyer remains in possession
of the car and delivery takes place through the change of intention of the parties to the contract.

(c) Constitutum possessorium

This method of delivery is the opposite of delivery with the short hand. Delivery in this case also takes
place through the change of intention of the buyer and seller, but the seller remains, after the contract
has been concluded, physically in possession of the object sold. For example, S sells a car to P, but at
the same time S and P agree that S will rent the car from P. Therefore, S (the seller) remains physically
in possession of the car after the contract has been concluded.
(d) Attornment

In this case the object sold is physically in the possession of a third party and delivery (as above) takes
place through a change of intention of the buyer and seller. Before the deed of sale is concluded the
third party concerned keeps the object on behalf of the seller, but after the conclusion thereof the
intention of the buyer and seller is that the third party should keep the object on behalf of the buyer. For
example, where a car is placed, by the seller, in possession of a panel-beater for repairs and the car is
sold during this period of repair. Before the contract is concluded the panel-beater keeps the car on
behalf of the seller, but after the contract has come about, the panel-beater keeps the car on behalf of
the purchaser. Consequently, delivery has taken place through the change of intention of the parties to
the contract. Mere notice to the third party of this change of intention is sufficient and no co-operation
of the third party in respect of this change of intention is required.

(e) Symbolic delivery

In this case the seller places the buyer in possession of a symbol by means of which the buyer gains
control over the object sold. For example, where a shipload of maize has been bought and the buyer is
placed in possession of the bills of lading to place him/her in control of the maize. Delivery, therefore,
takes place fictitiously (symbolically).

(f) Delivery through marking

In this case delivery takes place by marking the thing or things bought or sold. For example, where part
of a flock of sheep is bought, the sheep forming part of the transaction can be marked by a yellow mark
on the hind leg. Delivery takes place as soon as the yellow marks are made on the hind legs of the sheep
concerned.

(g) Delivery with the long hand

Delivery in this case takes place in that the object sold is pointed out by the seller to the purchaser with
the intention that ownership should pass.

(h) Clavium traditio

This is delivery by handing the keys to the object sold to the purchaser. This is not a form of symbolic
delivery, but the handing over of possession and control. If the party delivering retains a duplicate of
the keys, delivery is deficient.

Object delivered (How object should be delivered)

e.g A sells his grass cutting machine to B. A must deliver the machine and all the spare blades of the
machine. This will allow B to enjoy the machine. A sells his chickens to B and after the conclusion of
the contract, chickens lay eggs. A must delivery all the eggs to B. (Accessory accrual).
Date of delivery
Parties must deliver on the agreed date and if no date, on the reasonable date.

Place of delivery
Parties must agree to deliver on the place where they agreed on or place where contract is concluded,
or business or residence of the seller.

Influence of the CPA on Delivery of the Thing

CPA provides that the supplier must:
➔ Deliver at the agreed time or reasonable time.
➔ Deliver at the agreed place at the expense of the supplier.
➔ Supplier cannot expect the consumer to accept delivery at an unreasonable time.
➔ Delivery is assumed when consumer communicates that he accepted delivery.
➔ Or does something inconsistent with the ownership of the owner.
➔ Supplier must deliver quality goods as per agreement and specifications
➔ Consumer may accept or reject goods delivered at place and time not agreed on.
➔ Supplier must deliver right quantity of goods, if not, consumer may reject all the goods or accept
the right quantity.
➔ Supplier must deliver the goods as agreed, if not, the consumer can reject or accept only those that
were agreed on.
Practice question:
Jess owned a microwave. On 1 May 2020 she sold the microwave to Buthle for R1 000 and they agreed
that Buthle would pay Jess on 30 May 2020. Jess handed the microwave to Buthle on 1 May 2020. On
5 May 2020, Buthle sold the same microwave to Max for R1 500 cash. Max paid Buthle, and Buthle gave
Max the microwave. On 6 May 2020 Max sold the microwave to Dave for R2 000 cash but did not give
Dave the microwave. Dave immediately sold the microwave to Johnny for R2 500. They agreed that
Johnny could take the microwave home as soon as Dave received it from Max. They also agreed that
Johnny could pay Dave at the end of the month, provided that Dave could keep Johnny’s watch until he
received the R2 500. When Jess contacted Buthle for payment on 30 May 2020, she learned that Buhle
was out of the country on business and would only return in September 2020. Who is the owner of the
microwave?

Answer:

Break it down into smaller parts:

Textbook:

The minimum requirement for the transfer of ownership from the seller to the buyer is the delivery of
the thing sold. Ownership will not be transferred to the buyer where delivery has not been carried out,
even though the buyer has already paid the purchase price. The right to use, enjoy and dispose of the
thing is transferred to the buyer on delivery of the thing sold. Ordinarily, a buyer is entitled on delivery
to deal with the thing sold as he/she pleases without any need to account to the seller.

Jess handed the microwave to Buthle on 1 May 2020 → On 1 May, Buthle became the owner.

Max paid Buthle, and Buthle gave Max the microwave. → Max became the owner

Therefore, Max is the owner of the microwave.

SU 2.3: The warranty against eviction

Learning material

Business Law chapter 9 paragraphs 9.40 – 9.54

Learning objectives

At the conclusion of this study unit, you should be able to demonstrate your knowledge and
understanding of the warranty against eviction through your ability to:

1. explain the warranty against eviction, specifically in relation to

1.1. the definition of eviction;
1.2. the general principles that apply (also refer back to unit 1 and the res aliena); and
1.3. the forms of eviction;
2. discuss the duties of the purchaser when eviction is imminent;
3. state, and differentiate between, the rights of the purchaser in the case of total and partial eviction
respectively;
4. explain when the purchaser has no or limited rights of recourse;
5. discuss the influence of the Consumer Protection Act, 68 of 2008 on the warranty against eviction;
and
6. apply the abovementioned principles/law to relevant but unfamiliar scenarios to solve practical
problems.

Definitions
In this unit we are continuing with the duties of the seller. We are specifically looking at the warranty
by the seller against the eviction of the buyer.

What is warranty?
Guarantee or assurance.

What is eviction?
→ Eviction is the disturbance of the buyer to use, enjoy and dispose the thing bought, by a third party
with a greater right than that of the buyer in the thing. Eviction can be partly or complete.
→ E.g Sim buys a super bike from Tim while Tim is not the owner of the super bike. The true owner
of the bike has a greater right than that of Sim and can evict Sim (disturb Sim’s use, enjoyment
and disposal of the bike). The true owner can use rei vindicatio to take back his bike from Sim.
→ Thus, warranty against eviction is a guarantee by the seller that the buyer will not be disturbed.
General rule about the application of warranty of against eviction
 Warranty against eviction by the seller is automatically implied or included in the contract by the
operation of law.
 It is a naturale.
 Thus, parties are not required to reach consensus about the warranty.
 The basis of eviction must already be present when the contract is concluded.
 Eviction occurs when temporary disturbance of possession of the thing sold is becoming permanent.
 Mere threats of eviction do not bring about the cause action (bases to sue for breach of warranty) against
the seller.
 In other words, the buyer will only have the basis to sue for breach of warranty of eviction if eviction
has taken place or is in process.

Different forms of evictions

Read the forms in the textbook. Below are examples for each form from the textbook:
▪ Where the true owner uses rei vindicatio to take back what he owns from a buyer who bought an item
from person who is not the owner (thief or person who misrepresented that he is the owner).
▪ In terms of lien where the third party can keep property until the debt owed is paid. Here the buyer
cannot claim this property from the possessor in terms of lien because of the defective title. (or property
subject to judgement)
▪ Huur gat voor koop (lease takes precedence over sale) e.g buyer must allow the lease to occupy the
property until the lease agreement expires.
▪ The holder of limited real right (servitude) may have right to pass through the property of the buyer,
this is eviction in that it partially disturbs the buyer’s use, enjoyment and disposal of the land.

Duties of the buyer when eviction is imminent

The rule and effects
➢ The buyer must comply with requirements unless she can prove that the third party would have
succeeded even if she had complied with requirements because of the defective title of the seller.
➢ If not, he can lose her bases to sue the seller for breach of warranty.
➢ The Rule prohibits the buyer from surrendering possession of the thing bought from the seller.

Requirements to be complied with by the buyer

 The buyer must notify the seller about threatening eviction for the seller to help the buyer to provide
defence against the threatening eviction
 The notification must be on time.
 The buyer must notify the seller even if the seller knows about eviction
 Where buyer cannot find the seller, it will suffice if the buyer sends the notification to the last known
address of the seller.
What the seller can do after receiving notification
 The seller can assume all the rights of the buyer through cession (transfer of rights) and intervene.
 Can provide the proof of title
 Can be joined in the lawsuit
 Can do nothing

If the buyer does not notify the seller or the seller does nothing, the buyer must put the available strong
defence against the eviction before he can institute an action against the seller.

The buyer must act as reasonably in defending the eviction in the litigation (against the action of
eviction).

Remedy of the buyer against total and partial eviction (buyer’s right of recourse)
Total eviction
 The remedy of the buyer is actio ex empto, an action that is used by the buyer to claim the thing
bought or purchase price paid and the damages incurred by the buyer due to the contract of sale.
 Cancel the contract
 Claim purchase price not value of the thing during breach
 Claim damages which include interest or fruits paid to the true owner, legal costs to defend the
action of the true owner, costs of improvements of the thing, and increase in value of the thing.

Partial eviction
 Where eviction is substantial and has left the buyer with something that a reasonable person cannot
buy:
- Can cancel
- Claim the purchase price
- Claim damages
- And must return the thing that is left to the seller.
 Where eviction is not substantial, the buyer can:
- Keep the thing
- Claim payment proportional to what he is keeping (reduction of purchase due to partial eviction)
- Claim damages due to eviction

Circumstances where the buyer will have no right of recourse or limited right of recourse
❖ The seller is liable only where grounds of eviction existed at the conclusion of the contract and due
to his fault after contract.
❖ Even where liability of the seller is expressly excluded, the buyer can cancel and claim purchase
price.
❖ The seller is not liable where buyer was aware that he is not the owner.
❖ Where seller was unsure that he was the owner and buyer was informed, the seller is not liable.
❖ The seller is not liable when the time to claim from him by the buyer has lapsed (prescribed)
❖ The seller is not liable when disturbance (eviction) is due to vis major (acts of nature)

The influence of Consumer Protection Act 68 of 2008 (‘CPA)

 The CPA provides that in the agreement or transactions, the purchaser has the right to assume that
the supplier has powers to:
→ Sell
→ Transfer ownership
→ Supply
→ Lease
 And in the supply of goods where there is no agreement:
→ Supply
→ Ownership (uncertain whether the supplier must pass it)
→ The supplier is liable for all debts still owing on the thing sold if they were not declared in writing.
→ In case of defraud of the third party by the supplier and consumer, the supplier is liable
→ There is uncertainty with application of CPA in “lease precedes sale-huur gat voor koop”.
→ The supplier guarantees or promises that the consumer will have undisturbed use and enjoyment.
Practice question:
Maxine bought a BMW from Sipho for R500 000. Unbeknown to Maxine, Sipho was not the owner of
the thing sold but Josh was.

1) Which type of thing did Sipho sell?

2) How can Josh claim back his BMW from Maxine?
3) Does Maxine have any right of recourse against Sipho? Provide comprehensive reasons for your
answer.

Answer:

1) The BMW, as the thing sold is a res aliena, as it is a thing of which the seller is not the owner.
2) Using the vindicatory action called the rei vindicatio, wherein the owner who is out of possession
of the BMW sues to recover possession of his property.
3) Textbook:

The seller’s only duty in terms of a contract of sale is to deliver the undisturbed use and enjoyment of
all his/her rights in the thing to the buyer. However, if the seller knows that he/she is not the owner of
the thing and proceeds with the sale, the buyer who acts in good faith will be able to hold the seller
liable for fraud or fraudulent misrepresentation.

Since Maxine was not aware of the fact that Sipho was not the owner of the BMW and that Josh was
the actual owner of the BMW, Sipho’s actions can be construed as fraudulent misrepresentation.
Maxine can therefore hold Sipho liable.
SU 2.4: The warranty against latent defects

Learning material

Business Law chapter 9 paragraphs 9.55 – 9.106

Learning objectives

At the conclusion of this study unit, you should be able to demonstrate your knowledge and
understanding of the warranty against latent defects through your ability to:

1. explain the warranty against latent defects, specifically by

1.1. explaining the meaning of latent defects;
1.2. differentiating between latent and patent defects;
1.3. discussing the warranty against latent defects by operation of law;
1.4. discussing contractual warranties against latent defects; and
1.5. differentiating between warranties by operation of law and contractual warranties in the
context of latent defects;
2. discuss the actio empti with reference to the grounds for the institution thereof and what may be
recovered thereby;
3. discuss, and differentiate between, the aedilitian actions (actio quanti minoris and action
redhibitoria), specifically the grounds for instituting each and what may be recovered with them;
4. discuss when the aedilitian actions are not available;
5. differentiate between the action empti and the aedilitian actions with reference to the ground for
the institution thereof;
6. discuss the influence of the Consumer Protection Act, 68 of 2008 on the warranty against latent
defects; and
7. apply the abovementioned principles/law to relevant but unfamiliar scenarios to solve practical
problems.

Introduction and definitions

In this study unit we are dealing with the last duty of the seller.

 Warranty means guarantee or assurance

 Latent means underlying

Warranty in the contract of sale

• Warranty against latent defects applies by operation of law (naturalia) or
• It can be expressly or by conduct included in the contract (incidentialia).

The types of remedies in each of the aforementioned circumstances differ.

Meaning of latent defect

❖ Latent defect is a defect that renders that the thing sold:
- Unfit for purpose
- Where it was not known by the buyer at the conclusion of contract
- And could not be known or seen/noticed by the buyer upon reasonable inspection of the thing sold.
❖ Analysis of definition
- Latent defect differs with patent defect, in that the latter is a defect that could be noticed by the buyer
upon reasonable inspection of the thing.
- The test to determine whether there are defects is whether a reasonable person would have noticed
them or not and not an expert.
- The test of the nature of the defect and whether the defect renders the thing sold to be unfit for purpose
is that of the reasonable person (objective). In other words, a reasonable person must view the defect as
rendering the thing sold unfit for purpose.
- Only substantial defects qualify as latent defects.
- Servitude does not qualify as latent defect
- Whether a defect is latent or patent is question of fact.

Warranties against latent defects

Warranties by operation of the law
An implied warranty against latent defects that applies automatically by operation of law (as naturale)
forms part of every contract of sale, unless it is specifically excluded by a “voetstoots” (“as is”)
clause. A distinction should be drawn between cases where the merx was unfit for the purpose for
which it had been bought owing to the absence of certain required attributes, and cases where the
merx, notwithstanding the lack of such required attributes, was still fit for the purpose for which it had
been bought.

The remedies are two aedilitian actions, namely:

(a) the actio redhibitoria (to claim restitution); and
(b) the actio quanti minoris (to claim a reduction in the purchase price).

The buyer cannot claim damages with these actions.

Example:

Let’s use an example here to explain warranty by operation of the law.

E.g A sells his generator to B and generator over heats after 6 hours of use. The generator has a cooling
system and the cooling system is not functioning optimally and this causes the generator to shut down
for approximately an hour after 6 hours of use. B bought the generator for the alternative power supply
during intermittent power cuts. Upon the conclusion of the contract B inspected the generator and the
cooling system and could not notice the defect with the cooling system.

 In the example of warranty through operation of the law, guarantee against latent defect is automatically
included except where ‘voetstoots’ is included as a term in the contract and excludes the warranty.
 In the example we should distinguish between circumstances where the generator fails to provide alternative
power because of the defective cooling system and circumstances where despite the defective cooling system
the generator is still able to effectively provide alternative power.
Aedilitian actions available actions to the buyer:
 Actio redhibitoria
- Cancel the contract
- Claim the purchase price
 Actio quanti minoris
- Keep the item
- Claim the proportional deduction of price paid due to defect (the difference between the value of thing
sold without the defect and thing with the defect)

The buyer cannot claim consequential damages with these actions. (This is the demerit or weakness of
these actions)

Contractual warranties
E.g A sells B his generator and generator over heats after 6 hours of use. The generator has a cooling
system and the cooling system is not functioning optimally and this causes the generator to shut down
for approximately an hour after 6 hours of use. B bought the generator for alternative power during
intermittent power cuts. Upon the conclusion of the contract B inspected the generator and the cooling
system and could not notice the defect with the cooling system. A guaranteed that the generator
including cooling system are free from defects.

 With contractual warranty against defects, A as the seller expressly or by conduct provides
assurance that the generator does not have defects.
 Contractual warranty granted tacitly or by conduct depends on whether looking at the facts of the
each case, evidence of parties and all circumstances, it can be concluded on the balance of
probabilities that it was granted.
 The buyer can use actio empti to cancel the contract, claim purchase price and claim damages.
 The actio redhibitoria and actio quanti minoris are still available (aedilitian actions can be use)
but do not grant the buyer claim for consequential damages.
 In the actio empti the seller can raise defence of supervening impossibility and in aedilitian
actions the seller cannot raise defence of supervening impossibility.

It is better to use actio empti here.

Guarantees distinguished from misrepresentations or sales talk

▪ Misrepresentation is an untrue statement made fraudulently, negligently or innocently.
▪ If made within contractual clause, remedies of breach of contract are available
▪ If outside contract, delictual action is applicable.
▪ If innocently, aidelitian actions are available.
▪ Sales talks are mere/just opinions about the thing sold, they are not sales misrepresentations or
guarantees. If not true, the buyer has no remedy.
Actio empti
Grounds of institution/kick starting the action
 Where warranty against latent defect is given expressly or by conduct
 Where warranty is given for special attributes e.g. a heater sold to warm the house and the seller
sells the heater, there is warranty for special attribute. Where the heater fails, action can be
instituted for breach of warranty for special attribute/s.
 Where the seller intentionally hides latent defect on the thing.
- An objective test will be used to determine whether the seller intentionally hid the latent
defects.
- This will exclusively be deducted from evidence.
 The test is whether:
- The information was not known by the buyer
- No reasonable possibility that buyer would have known the information
- The sale was unfair to the buyer
- If all yes, the actio empti is applicable as there is a duty to disclose.
 Voetstoots not applicable where seller was aware of the defect when the contract was concluded.
 Where the seller is a dealer and has declared in public that she has expert knowledge about the
thing sold.
 Where the seller is the manufacturer and no need to declare in public. Negligence or ignorance of
the defect is not a defence.
 What may be claimed with actio empti
- Cancelation of the contract where defect is substantial
- Damages
 What may claimed by aedilitian actions (actio redhibitoria and quanti minoris)
- Applicable where there are latent defects and no express or tacit contractual warranty
- Applicable even where there are no defects
- Also applicable where there are latent defects and contractual warranty is applicable. But not
beneficial because they do not provide for a claim of damages.
 Actio redhibitoria and actio quanti minoris
- Grounds:
▪ Thing sold has latent defect
▪ The seller knew about defects and fraudulently hid them
▪ The seller expressly and tacitly guaranteed good qualities
▪ False representation about qualities or attributes of the thing sold (a dictum et promissum)
 - What may be claimed with actio redhibitoria:
▪ The purpose is restore the position of the parties before the contract
▪ The buyer can claim purchase price.
▪ The buyer must return the thing sold to the seller.
▪ Actio cannot be instituted more than once.
▪ This action is applicable when the defect in the thing sold is of such a nature that restitution is
justified. (objective test is applied)
- What may be claimed in terms of actio quanti minoris:
▪ Proportional reduction of the price(value of item without defect –value of item with defects =
proportional reduction of price
▪ Can be instituted more than once
▪ Where the value of the thing is higher than the price paid despite defect, no proportional
reduction.
 Where the aedilitian actions are not available
- Defect after conclusion of contract
- Defect not latent (refer to test)
- Voetstoots sale:
▪ Provided the seller did not know about the defect at the conclusion of the contract.
▪ If intentionally hid the defect in order to sell, voetstoots is not applicable.
▪ Non applicability of voetstoots covers the physical defects, defects in title and or area of property .
- Where the defect is repaired before the conclusion of the contract, if not, after conclusion of
contract the buyer is under no obligation to allow repair unless the seller is the manufacturer.
- Waiver where the buyer abandons the legal right against the seller while fully aware what he
is doing.
- Actio empti and aedilitian actions prescribe after three years from the time when the buyer
becomes aware of the defect.

Influence of the consumer protection act on warranty against defects

Quality of goods
Section 55(2) of the Consumer Protection Act 68 of 2008, if applicable [see 40.14 – 40.18], stipulates
that all goods, except those goods bought at an auction [section 55(1) read with section 45], must be
[sections 55(2) and 55(3)]:

(a) reasonably suitable for the purposes for which they are generally intended. In addition, if a
consumer (purchaser) has specifically informed a supplier (seller) of the particular purpose for
which he/she wishes to use or acquire the goods and the supplier ordinarily offers to supply such
goods, or acts knowledgeable about the use of those goods, a consumer may forthright expect that
such goods are reasonably suitable for the indicated purpose;
(b) of good quality, in good working order and free of any (not only material) defects;
(c) useable and durable for a reasonable period of time, having regard to the use to which they would
normally be put and to all the surrounding circumstances of their supply; and
(d) in compliance with any applicable standards set under the Standards Act 29 of 1993, or any other
public regulation.

In determining whether goods are in line with the above requirements, the circumstances surrounding
the supply thereof must be considered, including the manner in which the goods were marketed,
packaged and displayed, the use of any trade description or mark, any instructions for, or warnings
about, the use of the goods, the range of things that might reasonably be anticipated to be done with the
goods and the time when the goods were produced and supplied [section 55(4)].

Product failure or defects in goods

It is irrelevant whether a product failure or defect was latent or patent, or whether it could have been
detected by a consumer before taking delivery of the goods [section 55(5)(a)]. If an improved model of
such goods becomes available from the same or any other supplier, it cannot be assumed that the
improvement was because of a product failure or defect in the earlier model [section 55(5)(b)].

“Defect” in goods means any material imperfection in the manufacture of the goods or components that
renders the goods less acceptable than persons generally would be reasonably entitled to expect in the
circumstances, or any characteristic of the goods or components that renders the goods or components
less useful, practicable or safe than persons generally would be reasonably entitled to expect in the
circumstances [section 53(1)(a)].

“Failure” means the inability of goods to perform in the intended manner or effect [section 53(1)(b)]. It
is however unclear whose (in other words, consumers, suppliers, producers, importers or retailers)
“intended manner or effect” is under consideration. Available defence for product failure or defective
goods

It is a defence if a consumer was informed of the specific condition of the goods and he/she expressly
accepted the goods on that basis or knowingly acted in a way compatible with accepting the goods in
that condition [section 55(6)]. The effect of this section is that the use of a voetstoots clause is drastically
restrained and suppliers will generally have a duty to disclose all attributes of a merx. In this regard, the
rule caveat emptor (beware purchaser) seems to have been abolished.

Remedies
If the goods do not comply with the requirements and standards contemplated in section 55(2) [see 9.92
– 9.93] a consumer may return the goods within six months after delivery to the supplier (without
penalty) at the supplier’s risk and expense [section 56(2)]. This remedy may pose a practical problem
where the goods are immovable property and transfer thereof into the name of the consumer and
registration of a bond over it has been affected.
If the goods are returned, a supplier must, at the direction of the consumer, either repair or replace the
defective goods, or refund the purchase price [section 56(2)], provided that if a supplier repairs any
goods unsuccessfully he/she must, within three months of such failed repair, replace it or refund the
purchase price [section 56(3)].

Implied warranty for good quality of goods

In terms of section 56(1) any transaction or agreement is subject to an implied warranty by a “producer”,
“importer”, “distributor” and “retailer” [see 40.118 – 40.119] where these entities are defined] to the
effect that any supplied goods comply with the quality requirements and standards contemplated in
section 55(2) [see 9.92 – 9.93]. However, this implied warranty is not applicable if the goods fail to
meet the necessary standard because they were tampered with in some way after leaving the control of
the entity claimed against [section 56(1], or if a consumer was informed of the specific condition of the
goods and he/she expressly accepted the goods on that basis or knowingly acted in a way compatible
with accepting the goods in that condition [section 55(6)]. Furthermore, this implied warranty is in
addition to any other implied (not tacit) warranty or provision imposed by the common law, Consumer
Protection Act, public regulation or express contractual warranty or condition [section 56(4)].

A service provider also impliedly warrants the labour and every new or reconditioned part for a period
of three months after installation or such longer period as the supplier may specify in writing [section
57(1)].

Liability for damage caused by defective goods

A producer, importer, distributor or retailer (not a supplier or service provider) of any goods is liable
for any harm, without proof of negligence on his/her part, caused as a consequence of supplying any
unsafe goods, or a product failure of whatever nature, or inadequate instructions or warnings provided
to a consumer for the use of such goods [section 61(1)]. For the purpose of section 61, a “supplier of
services” who, in conjunction with the performance of those services, applies, supplies, installs or
provides access to any goods, must be regarded as a “supplier of those goods” vis-à-vis a consumer
[section 61(2)]. This subsection attempts to impose strict liability on, for example, an electrician who
installs a defective geyser or surgeon who implants a defective pacemaker.

Damages for which a person may be held liable includes the death, illness or injury to any natural
person, any loss or physical damage to any property and any economic loss that results from the
aforementioned [section 61(5)]. If more than one person is liable, their liability is joint and several
[section 61(3)]. Liability in terms of section 61 cannot be circumvented by a contractual indemnity or
waiver [section 51]. A plaintiff will still have to prove wrongfulness.
It is however a defence [section 61(4)(a) – (c)] against abovementioned liability:
(a) if the above envisaged damages are wholly attributable to the compliance with any public
regulation;
(b) if the alleged unsafe product characteristic, failure, defect or hazard did not exist in the goods at
the time it was supplied;
(c) arose from complying with the instructions provided by the supplier; or
(d) if it is unreasonable to expect the distributor or retailer to have discovered the shortcomings in the
goods, taking into account that person’s role in marketing the goods to consumers.

A claim for damages in this instance must be brought within three years [section 61(4)(d)] after the
death or injury of a person, or the earliest time at which a person became aware of an illness and its
cause, or the earliest time at which a person with an interest in any property became aware of the loss
or damage to that property, or the latest date on which a person suffered any economic loss.

If goods are supplied within South Africa in terms of a transaction that is exempted from the application
of the Consumer Protection Act, such goods, including the importer, producer, distributor and retailer
of those goods, are still liable in terms of sections 60 and 61 as discussed above.
Practice question:
Kamolego bought a boat from Steven for R500 000. He told Steven that he was going to use the boat as part of
his business. The business took clients out onto dams to fish. One day, Kamolego took a couple of clients out with
the boat onto the Rietvlei dam. Due to small holes in the casing surrounding the engine, the motor engine of the
boat was unfortunately not waterproof and the engine flooded with water when the boat idled for too long. The
result was that the boat, and its occupants, sank halfway into the water and were so stranded until a passer-by
noted their distress and towed them to the shore. Which of the following statements set out the correct legal
position in respect of Kamolego’s rights (choose 2 options)?

a) Kamolego will not be able to hold Steven liable for the defect if he noticed the holes in the engine’s casing
prior to concluding the contract.
b) Kamolego will be able to hold Steven liable if he did not notice the holes in the engine’s casing prior to
concluding the contract and if the holes were of such a nature that it would not be found by a reasonable
person who bought the boat after properly inspecting it.
c) Kamolego will not be able to hold Steven liable if he did not notice the holes in the engine’s casing prior to
concluding the contract but only after properly inspecting the boat, because an expert in his position ought
to have noticed the defect.
d) Kamolego has a duty to examine the object sold because the caveat emptor rule still applies to South African
common law transactions. Kamolego is only relieved from this duty where there is a duty to disclose on the
side of the seller, in which case non-compliance with this duty by the seller in respect of one defect will
automatically render the seller liable for all the defects in the object sold.
e) Because Kamolego can hold Steven liable for patent as well as latent defects, no duty to examine the object
exists at common law, since the seller’s duty to disclose has been developed by the courts to exclude the
application of the caveat emptor rule in common law consumer contracts.
f) Kamolego has the duty to conduct a reasonable inspection of the thing sold and as soon as he discovers the
defect during the inspection, his claim based on the warranty against latent defects will vest.
g) Kamolego has the duty to conduct a reasonable inspection of the thing sold and as soon as he discovers the
defect during the inspection, his claim based on the warranty against eviction will vest.
h) Kamolego has the duty to conduct a reasonable inspection of the thing sold and as soon as he discovers the
defect during the inspection, his claim based on the warranty against fraudulent misrepresentation will vest.
SU 3: The duties of the purchaser

Learning material

Business Law chapter 10 paragraphs 10.01 – 10.10 (leave paragraphs 10.11 and 10.12 as the contents
were already discussed as part of syllabus theme 2)

Learning objectives

At the conclusion of this study unit, you should be able to demonstrate your knowledge and
understanding of the duties of the purchaser through your ability to:

1. discuss the duty of the purchaser to pay the purchase price, specifically
1.1 the manner of payment;
1.2 time for payment;
1.3 payment in instalments; and
1.4 the place of payment;
2. discuss the duty of the purchaser to receive the thing sold and the consequences if the purchaser
does not receive the thing sold as agreed;
3. discuss the duty of the purchaser in respect of
3.1. the payment of transfer costs;
3.2. the payment of occupational rent; and
3.3. the payment to the seller of any advantage accruing to the thing sold before the sale had
become perfecta; and
4. apply the abovementioned principles/law to relevant but unfamiliar scenarios to solve practical
problems.

Duties of the buyer

Payment of the purchase price

Method of payment
 The buyer or representative of the buyer must pay the purchase price to the seller or the
representative of the seller.
 Payment must be by legal tender and cheque is not a legal tender and seller may refuse cheque.
 Buyer who has received delivery of the thing cannot refuse to pay full price

Date of payment for movables

• In cash sale, payment is made at the same time with delivery or on the same day.
• In credit sale, delivery is made at a future date after delivery is made.
Date of payment for immovables
 Payment takes place through the payment guarantees which are payable on the date of registration
of the immovable in the name of the buyer.
 Sale of immovable is subject to a suspensive condition of granting of mortgage bond.
 Payment is not a prerequisite for transfer of ownership as ownership is transferred when the
immovable is registered in the name of the buyer.

Payment in instalments
 Here the buyer is entitled to pay in instalments if the parties agree.
 The number of instalments, amount of each instalment and the date of payment must be fixed or
determinable.
 If not, the contract is void.
 Where the buyer fails to pay one instalment, the seller cannot claim all instalments unless
acceleration clause is applicable.

Place of payment
 At the stipulated place of payment.
 Where no stipulated place, where contract was concluded or where the thing was delivered.

Receipt of thing sold

 The buyer must receive the thing sold at the stipulated date and place in the contract.
 If no time, at reasonable time.
 Failure will lead to mora creditoris
 Where the thing is delivered contrary to agreed quality and specifications, the buyer may reject the
thing without being in breach and the seller commits breach in the form of positive
malperformance.
 Where buyer fails to receive and seller incurs costs of protecting and maintaining the thing sold,
the seller may claim the costs from the buyer.

Miscellaneous duties
 In the sale of immovable, the buyer is liable for transfer costs and transfer duty and the seller for
VAT.
 Buyer must pay rent where she has occupied before registration of the immovable is made in her
name.
 The buyer must pay all the benefits that accrued to her before the contract became complete
(perfecta) to the seller, unless parties have agreed otherwise.
THEME 3: SELF ASSESSMENT

Self-assessment revision: weeks 5, 6 and 7

Question 1
Debby and Mark were very eager to see the outcome of the match between Real Madrid and Atlético
on 21 April 2017. Debby warned Mark that Real Madrid would lose the game whereafter they agreed
that Mark would pay Debby a sum of R1 200 if Real Madrid lost the match. What is the legal status of
this agreement?

a) Void, because it does not comply with the requirement of physical possibility.
b) Valid, but subject to rectification.
c) Valid, but unenforceable.
d) Valid and enforceable.
e) Void, because the parties do not have a gambling license.

Question 2
John (the seller) and Gert (the buyer) sold and bought a car in terms of a written contract of sale for an amount of
R100 000. The contract of sale was concluded on 2 May 2020, the date on which the purchase price was also paid.
The contract of sale was not subject to a suspensive condition. After the conclusion of the contract of sale, but
before delivery of the car to Gert, the car was damaged in a hail storm. The latter occurred under the following
circumstances: John, who does not have a garage or other covered facility and who was not at home when the hail
damaged the car, could not have done anything to prevent the damage to the car. The legal position under these
circumstances is as follows:

a) John and Gert are co-liable for the risk.

b) The doctrine of the passing of risk is not applicable.
c) John bears the risk.
d) Gert bears the risk.
e) None of the mentioned options.

Question 3
Fill in the blank:

The claim for specific performance is a so-called natural remedy and the injured party is, as a general
rule, always entitled to this remedy.
Question 4
Jenny owed R6 000 to Betty. Because Jenny does a lot of charity work for the local orphanage, Betty
decided to send the following SMS to Jenny: “Thank you for your good work at the orphanage. You do
not owe me the R6 000, I lent to you, anymore. I hope you accept it like this.” Jenny accepted Betty’s
offer by sending the following SMS: “Thank you, I appreciate it.” In which manner was the contractual
relationship between Jenny and Betty terminated? Choose the most correct option:

a) Release.
b) By efflux of time.
c) By using the cancellation remedy.
d) Termination due to repudiation.
e) Set-off.

Question 5
Fill in the blank:

The claim for damages is a so-called combination remedy, because it is usually used together with a
claim for specific performance or a claim for cancellation of the contract.

Question 6
John (the seller) and Gert (the buyer) sold and bought a car in terms of a written contract of sale for an amount of
R100 000. The contract of sale was concluded on 2 May 2020. Gert has not paid the purchase price yet. The reason
for his failure to pay is that the payment of the purchase price, in terms of the contract of sale, is subject to Gert
securing a loan from a bank. After the conclusion of the contract of sale, but before delivery of the car to Gert, the
car was damaged in a hail storm. The latter occurred under the following circumstances: John, who does not have
a garage or other covered facility and who was not at home when the hail damaged the car, could not have done
anything to prevent the damage to the car. The legal position under these circumstances is as follows:

a) The doctrine of the passing of risk is not applicable.

b) John and Gert are co-liable for the risk.
c) John bears the risk.
d) None of the other mentioned options is correct.
e) Gert bears the risk.
Question 7
John and Tasha were married out of community of property on 1 February 2004 and the accrual system applied
to their marriage. They were divorced on 14 April 2009. John’s estate had an initial nett value of R250 000 and a
final nett value of R300 000. Tasha’s estate had an initial nett value of R100 000 and a final nett value of R250
000. Therefore, John was entitled to R50 000 from Tasha’s estate. After the divorce Tasha did not pay the R50
000 to John. On 18 May 2019, John wanted to institute an action to claim the R50 000 from Tasha. Choose the
correct answer:

a) Merger.
b) Tasha will be liable for interest at the rate of 13% for 5 years.
c) Tasha should use the exeptio non adempleti contractus as defence.
d) The claim has prescribed.
e) Breach of contract in the form of positive malperformance.

Question 8
Benny bought a cat from Jill for R5 000. In terms of the agreement, Jill had to deliver the cat to Benny’s home on
1 April 2020 at 16:00. Benny had to pay the purchase price immediately upon receiving the cat. On 1 April 2020,
Jill arrived at Benny’s home at 16:00 to deliver the cat, but Benny was not there yet. While Jill waited for Benny,
the cat unexpectedly died. When Benny arrived home at 21:00 that evening and discovered that the cat had died,
he informed Jill that the contract was terminated by the cat’s sudden death. Is Benny’s statement true or false?
Choose the most correct option:

a) False, the obligation perpetuates due to mora debitoris.

b) False, the obligation perpetuates due to mora creditoris.
c) True, cancellation is not possible where the breach is not substantial.
d) True, the debtor’s duty to take care of the object of sale diminished.
e) False, Benny may use the exceptio non adimpleti contractus against Jill.

Question 9
State whether the following statement is true or false: There is a presumption that a contract of sale is a
cash contract of sale.

a) True
b) False
Question 10
Fill in the blank:

The claim for cancellation is a so-called drastic remedy and the injured party may only cancel if he is
entitled to do so.

Question 11
In terms of a written contract of sale, John (the seller) and Andrew (the buyer) sold and bought Stand
123 in Modimolle, for an amount of R500 000. However, the buyer, Andrew, never signed the contract
of sale. Choose the option, if any, which correctly reflects the legal position in these circumstances:

a) The contract of sale between John and Andrew is voidable.

b) The contract of sale between John and Andrew is valid and enforceable.
c) None of the other mentioned options are correct.
d) If Andrew has paid the R500 000 in terms of the contract of sale, he can insist that Stand 123 in
Modimolle be registered in his name
e) If Andrew has paid the R500 000 in terms of the contract of sale, he cannot reclaim the money
from John.

Question 12
State whether the following statement is true or false:

A seller must protect the thing sold from the time of conclusion of the contract until the thing is delivered
to the buyer, and the buyer may claim damages from a seller for any damage caused by the seller’s
intentional or negligent contract.

a) True
b) False

Question 13
Jenny owed R60 000 to Betty in respect of a car Jenny bought from Betty on credit. Betty then borrowed
R60 000 from Jenny to use as a deposit on a house. In which manner was the contractual relationship
between Jenny and Betty terminated?

a) Release.
b) Novation.
c) Set-off.
d) Termination, by using the cancellation remedy.
e) Termination, due to repudiation.
Question 14
If the agreed formalities only have to serve as proof of the content of the oral contract between the contracting
parties, the legal position is as follows:

a) No formalities have to be complied with.

b) None of the mentioned options.
c) The contract comes into existence as soon as the requirements for a valid and binding contract are complied
with.
d) No valid and binding contract comes into existence.
e) The contract only comes into being after the other requirements to constitute a valid and binding contract
and the agreed formalities are complied with.

Question 15
Peter is 18 years old, but told Quinton that he is 21 years old. Peter showed Quinton his identification when he
bought a second hand iPad from Quinton. They agreed that Peter would pay the purchase price of R5 000 in two
equal instalments, over a period of 2 months. Quinton delivered the iPad to Peter. Three months later, Peter still
had not paid the second instalment, because he felt that the agreement was detrimental to him. Because Quinton
owed Peter R2 200 under a previous transaction concluded between them, they agreed that Peter does not have to
pay the second instalment. In which manner was the contractual relationship between Peter and Quinton
terminated?

a) Termination, by using the cancellation remedy.

b) Termination, due to repudiation.
c) Termination, due to minority.
d) Set-off.
e) Release.

Question 16
Pretty Petals (a florist) and Merry Weddings (a wedding venue) entered into a contract in terms of which Pretty
Petals had to deliver 1000 red roses to Merry Weddings, on Friday 2 May 2020 at 17h00. On 2 May 2020 at
17h00, Pretty Petals delivered 1000 yellow roses to Merry Weddings. Choose the most correct statement:

a) Pretty Petals committed breach of contract in the form of repudiation.

b) Pretty Petals committed breach of contract in the form of mora ex re.
c) Pretty Petals committed breach of contract in the form of positive malperformance.
d) Pretty Petals committed breach of contract in the form of mora ex persona.
e) Pretty Petals committed breach of contract in the form of performance rendered impossible.
f) Pretty Petals committed breach of contract in the form of mora debitoris.
g) Pretty Petals did not commit breach of contract, because it delivered the flowers on time.
Question 17
Coco and Chanel planned an engagement party and ordered a chocolate fountain from Quirky Catering for this
occasion. Quirky Catering agreed to deliver the chocolate fountain to the engagement venue at 17:00 on 21 May
2020. While on his way to deliver the chocolate fountain, John, the owner of Quirky Catering, stopped at a pub
for a drink. He got distracted by the rugby match on the pub’s television screen. By 21:00, the chocolate fountain
was not yet delivered. Choose the most correct option.

a) Breach of contract in the form of repudiation and the remedy is cancellation.

b) Breach of contract in the form of repudiation and the remedy is specific performance
c) Breach of contract in the form of mora creditoris and the remedy is cancellation.
d) Breach of contract in the form of mora debitoris (mora ex re) and the remedy is cancellation.
e) Breach of contract in the form of mora debitoris (mora ex persona) and the remedy is specific performance.

Question 18
B’s wedding was scheduled for 1 April 2017 and she entered into an agreement with Colourful Florists for the
delivery of 10 bouquets for the wedding reception. In terms of the agreement, B had to pay R5 000 for the flowers
and Colourful Florist agreed to deliver the flowers on 1 April 2017 at the reception hall. Colourful Florists forgot
about B’s order and failed to deliver on time. Choose the most correct option:

a) B will be entitled to cancel the contract on the basis that time was of the essence, provided that she acquired
a right to cancel.
b) B will be entitled to cancel the contract on the basis that time was of the essence.
c) B will not be entitled to cancel the contract, because the breach of contract was not material.
d) B will only be entitled to cancel the contract after a claim for specific performance failed.
e) B will not be entitled to cancel the contract, because there was no cancellation clause in the contract.

Question 19
Paul concluded a contract with Michelle in terms of which he leased an apartment to her for a period of 12 months.
The contract provided that Michelle must pay a monthly rent of R4 000. Michelle has not paid the agreed rent for
two consecutive months. Choose the option that does not fit:

a) Mora ex re.
b) Mora ex persona.
c) Letter of demand and cancellation.
d) Interpellatio.
e) Delay by the debtor.
Question 20
Complete the following sentence: A wager agreement ______

a) creates a natural obligation and is enforceable.

b) creates a legal obligation and is enforceable.
c) creates a legal obligation and is not enforceable.
d) creates an illegal obligation and is not enforceable.
e) creates a natural obligation and is not enforceable.

Question 21
On 2 May 2020, Andrew concluded a written contract with John. The circumstances are as follows: At
the time of conclusion of the contract, Andrew was under the impression that he was selling his car to
John. John, on the other hand, was under the impression that, in terms of the contract, he was hiring the
car from Andrew. The legal position under these circumstances is as follows:

a) A valid and enforceable contract of sale came into existence between Andrew and John.
b) No valid and enforceable contract came into existence between Andrew and John.
c) A valid and enforceable contract came into existence between Andrew and John, but it is neither a
sale nor a lease.
d) None of the other mentioned options is correct.
e) A valid and enforceable contract of lease came into existence between Andrew and John.

Question 22
On 15 March 2011, Sandy and Cleo entered into a purchase and sale agreement in terms of which Cleo
had to deliver a car to Sandy, on 1 April 2011 for the purchase price of R10 000. The parties agreed that
payment of the purchase price would be effected on the same day as delivery. Cleo delivered the car to
Sandy on the agreed date, but Sandy failed to pay the purchase price. On 1 April 2017, Cleo wanted to
institute an action against Sandy for payment of the purchase price. What is the correct legal positon
under these circumstances?

a) The debt is unenforceable, due to weak prescription.

b) The debt was extinguished, due to prescription.
c) Cleo will be entitled to use the debt as surety.
d) Prescription was interrupted.
e) Cleo’s claim will not succeed on the basis that she released Sandy from her duty to pay by not
claiming the purchase price within a reasonable period of time.
Question 23
On 1 May 2019, Mr Chetey concluded a lease agreement with Sammy in terms of which Mr Chetey agreed to lease his
1-bedroom apartment to Sammy for one year at R6 500 per month. Unbeknown to the parties, the apartment was
destroyed on 30 April 2019, by a sinkhole, which developed under the apartment’s foundations. When Mr Chetey found
out about the destruction of his apartment, he sent a letter to Sammy in which he advised Sammy that he could no longer
proceed with their lease agreement and that, as far as he (Mr Chetey) was concerned, their contract was not valid. Is the
statement made by Mr Chetey true or false?

a) False, because performance is not rendered impossible, it was impossible on the date of conclusion of the
contract.
b) False, because it is required from a lessor to ensure that the property he wants to rent out exists at the time
of conclusion of the contract.
c) True, because performance was subjectively possible on the date of conclusion of the contract.
d) False, because performance was subjectively possible on the date of conclusion of the contract.
e) True, because performance was objectively impossible on the date of conclusion of the contract.

Question 24
Andrew is 19 years old and owns a local night club, where alcohol is sold on a daily basis. Andrew concluded a contract
with Betty in terms of which he agreed to sell alcohol to Betty on account. Betty agreed to pay the total amount due on
the 25th of each month. Andrew has a liquor license as required in terms of the Liquor Act 59 of 2003. For two
consecutive months Betty did not pay her account (the money due to Andrew). Choose the option that does not fit:

a) Mora ex persona.
b) Damages.
c) Mora debitoris.
d) Mora ex re.
e) Cancellation.

Question 25
Prince inherited a house from his grandfather in 2015. On 1 April 2017, he decided to sell the house to pay for his
university fees. A written contract of sale, which was signed by both parties and attested to by two witnesses, was
concluded with Judy for the sale of the house at the market price of R1 500 000. Prince had not visited the house
in a while and did not know that the house burnt down a week before the contract of sale was concluded. What is
the status of the contract?

a) Valid, the sale of immovable property complies with the requirement of legality.
b) The contractual relationship was terminated, due to the fact that performance was rendered impossible by
the seller.
c) Void, the immovable property must first be registered in the name of the buyer before a valid contract is
concluded.
d) The contractual relationship was terminated, due to supervening impossibility.
e) No contract came into being, due to initial impossibility.
Question 26
Andrew wanted to buy a bag of tomatoes from Two Brothers (Pty) Ltd super market. The price indicated
on the bag was R20. When he wanted to pay, the cashier rang up an amount of R25. Andrew objected
to the higher price. What should the price be?

a) R25, because the price has been tampered with.

b) R22.50, because the average of the two prices will be accepted in such a case.
c) R20, because this is the price shown on the bag.
d) Uncertain, because the parties have to go to court first.
e) R25, because the supplier may change prices.

Question 27
Fred had been driving a Toyota for more than a year. The owner of the vehicle left the car in Fred's
possession and disappeared in the meanwhile. Fred wants to sell the car to Frank. Which of the
following statements is not true with regard to this res (thing)?

a) The nemo plus iuris rule is applicable.

b) The res (thing) belongs to the seller.
c) The seller transfers only the rights that he has to the buyer, and not necessarily full ownership.
d) According to the Consumer Protection Act, consumers can implicitly assume that suppliers have
the full ownership of a piece of property in a sale transaction and can thus transfer it.
e) A true owner can usually claim back the thing with the rei vindicatio.

Question 28
Pretty Petals (a florist) and Merry Weddings (a wedding venue) entered into a contract in terms of which
Pretty Petals had to deliver 1000 red roses to Merry Weddings on Friday 2 May 2020 at 17h00. On 1
May 2020, the owner of Pretty Petals set his storage rooms on fire to enable him to submit a fraudulent
insurance claim. Because the flowers were also destroyed, Pretty Petals could not deliver on Friday 2
May 2020 at 17h00 as agreed. Choose the most correct statement:

a) Pretty Petals committed breach of contract in the form of mora debitoris.

b) Pretty Petals committed breach of contract in the form of repudiation.
c) Pretty Petals committed breach of contract in the form of performance rendered impossible.
d) Pretty Petals committed breach of contract in the form of mora ex persona.
e) Pretty Petals did not commit breach of contract, because it was possible for the flowers to grow
again.
f) Pretty Petals committed breach of contract in the form of mora ex re.
g) Pretty Petals committed breach of contract in the form of positive malperformance.
Question 29
A owed R1 000 to B in respect of a cellphone A bought from B on credit. B then borrowed R1 000 from
A to purchase tickets for a concert. In which manner was the contractual relationship between the parties
terminated?

a) Release.
b) Novation.
c) Termination by using the cancellation remedy.
d) Set-off.
e) Termination due to repudiation.

Question 30
Andrew, a married man, wanted to convince one of his colleagues, Maggy, to engage in an extra-marital
affair with him and consequently agreed to donate R50 000 to Maggy. After Andrew paid the money to
Maggy, she refused to engage in the affair with him. The legal position in these circumstances is as
follows:

a) The donation contract between Andrew and Maggy is illegal and void and consequently Andrew,
due to the operation of the par delictum rule, cannot claim the money back from Maggy.
b) The donation contract between Andrew and Maggy is illegal and void and consequently Andrew,
due to the operation of the ex turpi causa rule, cannot claim the money back from Maggy.
c) The donation contract between Andrew and Maggy is voidable due to undue influence.
d) The donation contract between Andrew and Maggy is illegal and void and consequently Andrew
can, should the court relax the par delictum rule, claim the money back from Maggy.
e) The donation contract between Andrew and Maggy is illegal and consequently voidable.
Online Test 2

Question 1
Which of the following is not a requirement for a valid contract of sale of land regulated by the
Alienation of Land Act 68 of 1981?

(a) The contract must be in writing.

(b) The contract may be signed by the agent of the seller, but the agent must have the written
authority to sign the contract on behalf of the seller.
(c) The contract must be signed by the seller and the purchaser.
(d) The contract must be signed by the conveyancer who will transfer/register the property in the
name of the purchaser.
(e) The contract may be signed by the agent of the purchaser, but the agent must have the written
authority to sign the contract on behalf of the purchaser.

Question 2
Zinn and Ham have concluded a contract of alienation of land. In the contract Zinn is selling his land
Erf 56 East Side to Ham and Ham agrees to buy the land. In the deed of alienation, Zinn’s agent has
mistakenly written 65 Erf East Side. It happens that Zinn is the owner of both lands. Later Ham seeing
that Erf 65 is bigger than Erf 56 Eastside, he insists that him and Zinn had the intentions of concluding
a contract for the alienation of 65 Erf Eastside not Erf 56 Eastside and indicates that they can only rely
on the deed of alienation to prove that. Moreover, Ham claims that in terms of parol evidence no external
evidence can be furnished to correct the mistake by Zinn’s agent.

(i) Ham is incorrect because parol evidence can be counteracted if it leads to unfairness in the contract.
(ii) Ham is incorrect based on ex turpi causa
(iii) Ham is incorrect based on emptio speratae
(iv) Ham is incorrect based on par delictum
(v) None of the options

(a) Only (ii) and (iii)

(b) Only (ii)
(c) Only (iv)
(d) Only (iii)
(e) Only (i)
Question 3
James and Jessy agreed that James would sell his racehorse to Jessy for R500 000. The horse was to be
delivered to Jessy's farm at 09h00 on 5 May 2021. On 4 May, Jessy found out that James intended to
leave the country with the racehorse that evening, never to return. Under these circumstances, Jessy can
(choose the most suitable option):

(a) Approach the court and obtain an interdict to prevent James from leaving the country with the
racehorse.
(b) Claim immediate performance from James: he has to deliver the racehorse to her farm immediately.
(c) Wait until James leaves the country with the racehorse and claim specific performance.
(d) Wait until James leaves the country with the racehorse and claim damages.
(e) Cancel the contract immediately and claim damages.

Question 4
A concludes a contract with B, in the contract A sells his vintage car to B for R80 000. A delivers the
car to B and A and B agree that B will pay on the 5 of April 21. On the 5 of April 21, B fails to pay A.

(a) None of the options.

(b) B is not in mora creditoris because the purchase price is not due and enforceable.
(c) B is not in mora debitoris because the purchase price is not due and enforceable.
(d) B is in mora creditoris.
(e) B is in mora debitoris.

Question 5
Cassie and Sassy enter into a contract in terms of which Cassie buys one of the puppies with which
Sassy's dog, Milly, is pregnant for R2 500. They agree that Cassie can pick her puppy once the litter
has arrived. Complete the following sentence by choosing the most suitable option: This contract
contains a __________ obligation.

(a) generic
(b) vague
(c) physically impossible
(d) statutory
(e) legally impossible
Question 6
Casper and Jasper were bankrobbers. They entered into a contract in terms of which they agreed to split
the proceeds of any money 50:50. They robbed ABC Bank and got away with R5 000 000 cash. Casper
stored the cash at a safe location and refused to give Jasper his R2 500 000. Which of the following
statements is correct?

(a) None of the mentioned options.

(b) The par delictum rule allows Jasper to claim the R2 500 000 from Casper.
(c) The ex turpi causa rule allows Jasper to claim the R2 500 000 from Casper.
(d) Jasper may claim damages from Casper.
(e) Jasper may claim specific performance from Casper for payment of the R2 500 000.

Question 7
Dorcas concludes a contract with Tim. In the contract Dorcas pays Tim to continue to have an extra-
marital relationship with her.

(a) This contract is against good morals.

(b) This contract is against legislation.
(c) This contract is against the restraint of trade.
(d) This contract is against wagers.
(e) None of the options.

Question 8
Which of the following does not terminate a contract?

(a) Set-off
(b) Pre-incorporation contract
(c) Performance
(d) Impossibility of performance
(e) Prescription
Question 9
Ghert and Monoyane entered into a contract in terms of which Ghert had to deliver airplane fuel to Monoyane at
the airport where Monoyane's private jet was stored. Delivery had to occur by 13h00 on 5 May 2021 because
Monoyane had to fly important delegates to Zambia. Ghert was aware of Monoyane's contractual commitments
in terms of the latter's contract to fly the delegates to Zambia but failed to deliver airplane fuel to Monoyane as
per their agreement. As a result, Monoyane was unable to fly the delegates to Zambia and suffered damages in
the amount of R500 000. Under these circumstances, (choose the most suitable option):

(a) Monoyane cannot claim the damages suffered as a result of Ghert's breach of contract from Ghert as
patrimonial damages are not recoverable as contractual damages and must be claimed as delictual
damages.
(b) Monoyane can claim the damages suffered as a result of Ghert's breach of contract from Ghert as general
damages as flying delegates to Zambia is a natural consequence of purchasing airplane fuel.
(c) Monoyane can claim the damages suffered as a result of Ghert's breach of contract from Ghert as non-
patrimonial damages.
(d) Monoyane can claim the damages suffered as a result of Ghert's breach of contract from Ghert as special
damages as Ghert was aware of Monoyane's commitments in terms of the latter's contract to fly the
delegates to Zambia.
(e) Monoyane can claim the damages suffered as a result of Ghert's breach of contract from Ghert as
emotional damage due to the embarrassment that he faced when the delegates arrived but his plane had
no fuel.

Question 10
Zweli and Frank conclude a contract of sale. In the contract Zweli sells his drone to Frank for R3000. Zweli and
Frank agree that delivery and payment will take place at the same time. Zweli delivers the drone and Frank pays
R1500 because the drone is incomplete as there are missing parts. Frank will have to pay R 1500 to buy and install
the missing parts. Zweli insists that Frank must pay full price as per their agreement otherwise his action amounts
to a breach of contract.
(i) Frank can withhold the balance of money due to exceptio non adempleti contractus
(ii) Frank can withhold the balance of money due to vis major
(iii) Frank can withhold the balance of money due to parol evidence
(iv) Frank can withhold the balance of money due to par delictum doctrine
(v) Frank is not in breach of contract

Choose the correct option:

(a) Only (i) and (v)

(b) Only (iv)
(c) Only (iv) and (v)
(d) Only (iii) and (iv)
(e) Only (ii) and (iii)
Question 11
Which of the following statements is correct? Choose the most suitable option: In respect of a contract
of purchase and sale:

(a) The buyer becomes the owner of the thing sold upon conclusion of the contract of purchase and
sale, provided that the seller is the owner of the thing sold.
(b) If the seller is the owner, the seller must transfer ownership to the buyer of the contract of
purchase and sale but can reclaim the object sold with the rei vindicatio.
(c) The seller, who is also the owner, can choose to sell the thing that he or she owns as a res aliena
and will then not have to transfer ownership of the thing sold to the buyer.
(d) The seller need not be the owner of the thing sold but if the seller sells a res aliena, the true
owner may claim the thing sold back with the rei vindicatio.
(e) The seller becomes the owner of the thing sold as soon as he or she sells the thing, and the
concept of a res aliena does not exist in South African law.

Question 12
Which of the following statements is not correct? Complete the sentence by choosing the most suitable
option: For a contract of purchase and sale to be validly concluded,

(a) the seller need not be the owner of the thing sold.
(b) the execution of the contract must be physically possible.
(c) the purchaser must have paid the purchase price and the seller must have delivered the object
sold.
(d) the object sold must be merchantable.
(e) the purchaser must agree to pay the purchase price and the seller must agree to deliver the thing
sold together with all the rights in the object that the seller may have.

Question 13
State whether the following statement is true or false:

There is a presumption that a contract of sale is a cash contract of sale.

(a) True
(b) False
Question 14
Coco and Chanel planned an engagement party and ordered a chocolate fountain from Quirky Catering
for this occasion. Quirky Catering agreed to deliver the chocolate fountain to the engagement venue at
17:00 on 21 May 2020. While on his way to deliver the chocolate fountain, John, the owner of Quirky
Catering, stopped at a pub for a drink. He got distracted by the rugby match on the pub’s television
screen. By 21:00, the chocolate fountain was not yet delivered. Choose the most correct option.

(a) Breach of contract in the form of mora debitoris (mora ex persona) and the remedy is specific
performance.
(b) Breach of contract in the form of repudiation and the remedy is cancellation.
(c) Breach of contract in the form of repudiation and the remedy is specific performance
(d) Breach of contract in the form of mora creditoris and the remedy is cancellation.
(e) Breach of contract in the form of mora debitoris (mora ex re) and the remedy is cancellation.

Question 15
On 5 January 2021, Macy bought a house from its owner, Mrs G, for R2,5 million. The sale was subject
to the condition that Macy obtain a bank loan from a financial institution for the full purchase price on
or before 25 January 2021. Macy obtained a loan from B Bank on 13 January 2021. The house was
registered in the name of Macy on 1 April 2021 at the Deeds Office in Pretoria. On 30 January 2021
the house was partially destroyed in a fire caused by a severe thunderstorm. Who will bear the risk of
the damage to the house if the parties did not include any such clause in the agreement? Choose the
most suitable option:

(a) Mrs G would bear the risk as the doctrine of passing of risk applies. The damage was caused
through no fault of the parties. The sale is not yet perfecta and Mrs G, as the seller/owner, will
bear the risk.
(b) Macy would bear the risk as the doctrine of passing of risk applies. The damage was caused
through no fault of the parties. The sale is perfecta and Macy, as the buyer, will bear the risk.
(c) As the damage was caused through no fault of the parties, no one will bear the risk.
(d) Macy would bear the risk as the doctrine of passing of risk applies. The damage was caused
through no fault of the parties. The sale is not yet perfecta and Macy, as the buyer, will bear the
risk.
(e) Mrs G would bear the risk as the doctrine of passing of risk applies. The damage was caused
through no fault of the parties. The sale is perfecta and Mrs G, as the seller/owner, will bear the
risk.
THEME 4: GENERAL PRINCIPLES OF THE LAW OF AGENCY

SU 1: Introduction to the law of agency

Learning material

Business Law chapter 5

Learning objectives

At the conclusion of this study unit, you should be able to demonstrate your knowledge and
understanding of the law of agency as follows:

1. Explain, and provide your own examples of, the following concepts: agency, act of agency, agent,
principal and authority;
2. Explain and identify the requirements for a valid act of agency;
3. Differentiate between agency, mandate and an employment contract;
4. List, explain, and differentiate between, the sources of authority and the requirements for each
source in detail;
5. Explain and differentiate between express, tacit and ostensible authority;
6. Explain the formalities in respect of authority;
7. Explain the manners in which authority is terminated and determine whether authority has been
validly terminated;
8. Apply the abovementioned principles/law to relevant but unfamiliar scenarios to solve practical
problems.

Basic concepts of the law agency

 Agency is where a person due to convenience or where a person is unable to conclude juristic or legally
binding acts or any acts, appoints another as their agent to conclude legally binding acts or any acts on
their behalf with the third party.
 Thus, an agent is a person who can conclude, change or execute legally binding acts or any acts on
behalf another (his principal) with third parties.
 A principal is a person who contracts (grants authority) with the agent for the agent to conclude legally
binding contracts or any acts on his behalf with the third party.
 Agency always involves at least 3 parties – a tripartite relationship between the principal, the agent
and a third party.
 E.g. Anna a prominent property developer appoints Cindy an attorney to conclude all contracts relating
to her business with third parties. (This is a conventional representative or agent as appointment is made
by the principal.)
 e.g Tim a managing director of Cool Air Ltd is an agent of the company when it comes to the conclusion
of legally binding acts with third parties. (Contracts of purchase of merchandise for the company) (This
is a conventional representative or agent as appointment is made by the principal (company).
 e.g Samson a guardian of a minor Susan, concludes a contract of sale on behalf of Susan . (This is a
juristic representative or agent as the agent’s appointment arises due to the operation of the law)
 There are always three parties in agency, the principal, agent and third party.
 The agent can only act on behalf of the principal when authority to act is granted.
 This means that the agent must act within the confines of his authority.
 When the agent has executed her duties in accordance with the authority granted and within the confines
of his powers, rights and duties between the principal and the third party will arise as if the principal
acted on his own.

Acts of agency
 The act of agency refers to the juristic act that the agent performs on behalf of the principal, such as the
conclusion of a contract.
 Legal consequences of the acts of agency are attributed to the principal.
 Acts of agency are legally binding acts such as conclusion of contracts.
 When concluded in accordance with authority granted and within the powers of the agent, the principal
will incur rights and duties as per the contract.
 Where performance is of such a personal nature, then agency is not possible or where the law prohibits
agency.
 E.g. Where A, a known musician offers expensive music lessons in person to C, a third party. A cannot
appoint B as an agent to provide lessons to C. Here the performance is of a personal nature. This means
that is it important to the third party that the principal must act or perform.

Authority (Mandate)
❖ For the agent to bind his principal in a legally binding act with a third party, the two important questions
should be asked:
- Did the principal grant authority?
- Did the agent act within the confines of authority?
❖ If not, the agent may incur liability.

Sources of authority
Contractual authority
◆ e.g A concludes a contract of agency with B for B to conclude a contract of sale of the car with C on
A’s behalf. In the contract B as A’s representative will be paid commission.
◆ The contract between A and B takes the form of mandate.
➔ Here A as principal will have to offer to conclude a contract with B an agent. For B to sell A’s car to C
a third party.
➔ The contract takes the form of the contract of mandate.
➔ B (agent or, in this case, mandatary) can accept or reject the contract from A (principal or, in this case,
mandator).
➔ Once B accepts, the agreement or consensus is reached.
 ➔ Authority to act is granted to B
➔ This may also be applicable in employment contracts, where B is A’s employee.
o B will be A’s agent depending on the terms of the employment contract.
o The general rule is that where B is not controlled by the employer and can act independently, he is
an agent not an employee.
➔ The authority is not required to be granted in writing but can be granted orally.

Note that in the contract of employment there is control by the employer in the execution of tasks and
in agency there is independence in the execution of tasks.

Ratification (approval after the fact where agent acted without authority)
 Ratification involves the express or tacit approval by the principal after the agent had already acted,
 E.g A concludes a contract of agency with B for B to conclude a contract of sale of the car with C
on A’s behalf. Just before B meets with C for the conclusion of the contract of sale of the car, A
calls B and instructs that B must stop with the sale as he would like to keep the car (terminates
mandate). B nonetheless proceeds with the conclusion of the contract of sale with C.
 Ratification is an express or tacit (in between the lines) approval or acceptance by the principal of
a contract concluded by the agent on behalf of the principal with the third party without authority
to do so or without the confines of authority.
 Requirements
→ A as a principal must exist when B concluded the unauthorised contract with C.
→ A as principal must intend or desire to ratify (accept the unauthorised contract).
→ A as principal must alone express that he ratifies (accepts the contract).
→ A as principal must ratify the contract within fixed or reasonable time after conclusion of the act by the
unauthorised agent.
→ The unauthorised agent must have intended to act on behalf of the specific principal or determinable
principal not himself.
→ The act agency (selling the car) must have been valid. (All contractual requirements must be complied
with)
 If all these requirements are present or complied with, the principal will be retrospectively bound,
meaning as from the date of the conclusion of an unauthorised contract with the third party.

Implied authority (by law or ex lege)

▪ This is where agents are appointed by operation of the law to act on behalf of principals that cannot
act on their own. Note that principals cannot appoint agents in these examples.
▪ E.g. A, a prodigal has a tendency to waste his estate and B is appointed as a curator to act on A’s
behalf.
▪ E.g. A, a partner in a partnership has the authority to represent the partnership as an agent, provided
the partnership agreement does not provide otherwise and the act is within the scope of the
partnership’s business.
▪ See other examples in the textbook and think about other examples.

Ostensible authority
 Ostensible authority or (apparent or perceived authority where one does not have authority) also
known as Estoppel
 E.g A, a doctor has a surgery and has concluded a contract of agency with B for B to purchase
medical equipment from C on his behalf. B has represented A for the past 10 years. On the 19 of
May 21, A terminated the contract of with B and failed to inform C,
 Or A ratifies all the contracts concluded by B on his behalf with C despite the fact that agency has
been terminated. On the 17 of September 21, B concludes a huge contract with C, supposedly on
behalf of A. However, A does not need the equipment and has no money to pay for the contract.
 Thus, A wants to rely on the truth that B does not have the authority to represent him, as agency
has been terminated between them.
 Estoppel stops or prevents A from relying on the truth that B has no authority to represent him and
thereby rendering him liable for the contracts concluded by B on his behalf. This is due to his role
in creating an impression that B has authority to represent him while this is not the case.
• Estoppel is a rule of fairness
• B does not have authority
• But A has created the impression that he still has authority to represent him by failing to inform the
third party C that agency is terminated or
• By continuing to honour or ratify unauthorised contracts concluded by B on his behalf with C.
 Requirements of estoppel
• Intentional or negligent creation of impression by the principal
• Representation must be one that can reasonably be expected to mislead the third party. (It must be
material or serious)
• The third party must have been made or led to act by the impression.
• The third must have suffered damages (prejudice) due to the impression.
 The effect of Makate vs Vodacom Ltd 2016 (4) SA 121 (CC).
• The judgment of the court altered the relationship between the ostensible authority and estoppel.
- According to majority judgment, one need not prove all elements of estoppel to establish ostensible
authority.
- Ostensible authority and Estoppel are distinct from each other but have one common requirement
which is the creation of impression.
- Ostensible authority is now regarded as actual authority.
- Estoppel is a defence that is used to bar (stop) the principal from relying on the truth.
Scope of authority
 When you have determined that the principal has granted authority to the agent to act.
 You need to then determine what the agent can do and cannot do in terms of the terms of contract
between him and the principal.
 The contract may provide one specific act related to the business of the principal or can provide a
wide scope of authority that allows the agent to conclude all acts related to the business of the
principal.

Express authority
▪ Express authority means authority granted in clear terms in writing or verbally. (What the agent
can do and what he cannot do.)
▪ Facts of each case will be relevant in determining what the written and verbal terms are.
▪ Here the principal need not write everything or say everything but allows the agent some freedom.

Tacit authority (between the lines authority/terms)

▪ E.g. A, a doctor concludes a contract of agency with B an experienced nurse to purchase medical
equipment from C on his behalf. A does not specify which equipment to buy and B purchases all
medical equipment that is necessary for a surgery.
- The doctor has expressly granted authority to B to act.
- However, with regards to which equipment to purchase is authority or term that is not given
directly in writing or spoken but can be read between the lines.
- Whether a term or authority can be read between the lines, the bystander test is used where an
objective person is asked whether a term can be included or read between the lines and if the
answer is yes, there is tacit authority.
▪ Three specific instances of tacit authority:
- General (or related) authority is where a liquor manager is in addition to his authority to
manage the store, has the authority that generally relates to the management of the store e.g.
purchasing beverages etc.
- Special (or customary) authority in circumstances where the agent is given authority to
execute a specific task, he may tacitly have the authority to do other things that are necessary
for proper execution and also all those that are acceptable as trade usage in that sphere.
- Normal authority of professional persons is where the agent who is a professional person is
given tacit authority to do all that is necessary or that a person in that profession does to execute
the task unless parties agree otherwise.
Ostensible authority
This is where the principal has created an impression that the agent has authority whereas this is not the
case. See the discussion above.

Formalities when granting authority and (power of attorney)

➢ It is not a requirement for authority to be granted in writing, authority granted orally will suffice.
➢ However, in some instances it is a requirement to grant authority in writing. This is referred to as
power of attorney. It must be in writing, signed by principal and provide what the agent’s specific
and general authority entails.
➢ Power of attorney does not mean that one of the parties should be an attorney. The agent can be in
any profession or be an ordinary person.
➢ When authority is required to be in writing:
- Where one is granted authority to alienate land (sell land/or alienated an interest in land) in
terms of Alienation of Land Act 68 of 1981 on behalf of a principal.
- Where a conveyancer transfers ownership of land from one person to another or where she
registers a mortgage bond. Written authority must be given to the conveyancer by the parties.
- Where a legal practitioner institutes an appeal or opposes an appeal in the High Court.

Termination of authority
Please study this on your own on paragraph 5.30. This is important and you may be tested or examined
on it. We are not discussing it as the information is easy to comprehend.

Textbook:

Authority is terminated:
(a) when the authority has been executed, hence when the task given to the agent has been completed (also when
the agent is no longer able to perform under the authority);
(b) when the authority was granted for a specific period and that period expires;
(c) when the principal and agent terminate the authority through mutual agreement;
(d) if the authority had its source in a specific legal relationship between the parties (for instance, employer-
employee or company-director) and that relationship ends;
(e) when there is a change in status of the parties, for instance when the principal or agent becomes mentally ill,
when the principal or agent dies, or when the principal is declared insolvent (the agent’s insolvency will not
necessarily impact the authority but might cause the principal to revoke the authority);
(f) when the principal revokes the authority that he/she granted the agent. However, such revocation is not
possible if the authority was granted irrevocably or if the authority has already been executed; or
(g) when the agent at any stage renounces the authority that was granted to him/her. However, he/she may not
do so if the principal will be prejudiced or will suffer a loss due to the renunciation.
 The first 5 circumstances of termination are easy to comprehend and with the last 2, you need the
meaning of the key words to comprehend the meaning of the circumstances.
 Note that the word ‘revokes’ means cancel.
 Note that the word ‘irrevocable’ means not capable of cancellation.
 Note that the word ‘renounces’ means relinquishes.
SU 2: The principal and agent

Learning material

Business Law chapters 6 and 7

Learning objectives

At the conclusion of this study unit, you should be able to demonstrate your knowledge and
understanding of the legal position of the principal and agent as follows:

1. Explain the relationship between the principal and the agent;

2. Name and explain the duties of the principal with specific reference to the payment of
compensation, payment of agent's commission, indemnification against losses, reimbursement of
expenses and accounting for services rendered;
3. Determine whether a principal has complied with his duties towards the agent;
4. Explain the manners in which compliance with the duties of the principal may be enforced with
specific reference to the agent's lien and the right of set-off between the principal and agent;
5. Name and explain the duties of an agent;
6. Explain the relationship between the principal and the third party with specific reference to the
liability of the principal towards third parties;
7. Explain the relationship between the agent and the third party with specific reference to the liability
of the agent towards third parties;
8. Explain, and differentiate between, the concepts of the non-existent and undisclosed principal;
9. With reference to special types of agents – an estate agent, broker, auctioneer, company
representative and representative of a close corporation:
9.1 Define an agent in general and the abovementioned special types of agents in particular;
9.2 List the function/s and duties (where applicable) of each of the special types of agents;
9.3 Explain the general rules and principles of law that govern the conduct of each of the special
types of agents, with specific reference to the rules regarding the remuneration of estate agents.
10. Apply the abovementioned principles/law to relevant but unfamiliar scenarios to solve practical
problems.

Introduction
E.g. A, a doctor concludes a contract of agency with B an experienced nurse to purchase medical
equipment from C on his behalf. In the contract A provides that B should purchase all the equipment
that B thinks are necessary for the surgery. And B will be paid for his services.

In a contract of agency such as this one, both parties the principal and the agent have duties to one
another. And each party has corresponding rights to receive the duties.
Duties of the principal
❖ Duty to compensate the agent for work done.
 The principal has the duty to compensate the agent only if the contract agency expressly or
tacitly provides that.
 The date of payment is when the duty is executed or purchase price is paid. And if the contract
of agency does not provide otherwise, the principal is liable to pay the agent even if he did not
gain anything from the actions of the agent.
 When parties agree that compensation will be paid to the agent they usually agree about the
formula to calculate compensation e.g. 3% of the purchase price or the principal will pay the
usual fee for the work done.
 If parties do not agree on the formula, usual fee for that work is paid, if not known, then fee in
terms of trade usage is paid, if this is also not known, that the court will determine the reasonable
fee taking into consideration the facts of the case.
 The agent is will not be entitled to be paid if:
1) Acted outside the scope of his authority
2) Negligently caused damage to the principal (failed to act with care)
3) He made a secret profit (a profit in terms of agency without the knowledge of principal)
4) His interests conflicted with his duties to the principal (he pushed his interests at the
expense of his duties to the principal)
5) Breached the contract of agency

Duty to indemnify the agent

The principal must indemnify or assure the agent that he will be protected against liability or loss
duly/appropriately incurred in the execution of his duties.

Duty to reimburse agent for expenses

▪ The principal must reimburse the agent all the necessary and reasonable expenses incurred in the
execution of the tasks.
▪ No reimbursement for negligence or failure to exercise duties.
▪ Duty to reimburse may be excluded in the contract.

Duty to account to agent

The principal must regularly draw up statements to account to the agent as to how much he owes the
agent compensation or commission.
Special ways to enforce principal’s duties:
Lien (right of retention of property)
If the principal owes money to the agent, the agent can keep the principal’s property in his possession
until the principal pays.

Set off
If the principal owes money to the agent, the agent if in possession of money due to the principal can
deduct what is owed to him and pay the difference to the principal.

Duties of the agent

Duty to perform his mandate
General:
➢ The agent must perform his duties and if he fails he will not be entitled to compensation.
➢ The agent must act within the scope of his authority, if not he will be liable for damages suffered
by the principal and the principal will not be bound.
➢ The agent must not delegate, but the principal may expressly or tacitly allow delegation. However,
the agent must ensure that the task is performed properly by the person delegated.

Duty to act with knowledge, care and skill

 The agent must act with knowledge.
 The agent must act with care and diligence, the extent of care and diligence will be measured in
terms of the circumstances of each case. If the extent of care and diligence cannot be measured,
the reasonable person’s test will be used to measure the required care and diligence.

Duty to act in good faith

 Generally duty of good faith entails that the agent must act with utmost honesty when representing
the agent.
 This duty entails the following:
→ Duty to avoid a conflict of interest
▪ Let’s use an example to explain this duty.
▪ E.g. A, a doctor concludes a contract of agency with B an experienced nurse to purchase
medical equipment on his behalf from C a company that manufactures medical equipment.
In the contract A provides that B should purchase all the equipment that B thinks are
necessary for the surgery. And B will be paid for his services. B happens to own shares at
C a company that manufactures medical equipment and A is not aware.
▪ B an agent must promote the interests of A his principal only.
 ▪ A conflict of interest provided in the example is not acceptable where B’s interests come
into the picture in conflict with A interests. (B buys his own equipment and makes profit
as he is a shareholder in the company C)
▪ A can terminate the contract of purchase.
▪ However, where B informs A before execution of the task and A grants permission, then
there is no problem.
▪ See the good example in the textbook.
→ Duty not to make secret profit
▪ Let’s use an example to explain this duty.
▪ E.g. A, a doctor concludes a contract of agency with B an experienced nurse to purchase
medical equipment from C on his behalf. In the contract A provides that B should purchase
all the equipment that B thinks are necessary for the surgery. And B will be paid for his
services. B happens to own shares at C that manufacture medical equipment and A is not
aware. Say in our example C grants B a discount and B fails to disclose it to A.
▪ B has breached his duty not to make a secret profit from the contract of agency or execution
of tasks that relate to the contract of agency.
▪ B must keep the profit not for himself but for A.
→ Bribery
▪ Let’s use an example to explain.
▪ E.g. A, a doctor concludes a contract of agency with B an experienced nurse to purchase
medical equipment from C on his behalf. In the contract A provides that B should purchase
all the equipment that B thinks are necessary for the surgery. And B will be paid for his
services. B happens to own shares at C a company that manufacture medical equipment
and A is not aware. C a company through one of its directors pays B a bribe to influence
B to accept to pay an inflated price for the medical equipment.
▪ Here B has failed to fulfil his duty to act in good faith as there is bribery.
▪ A may cancel the contract
▪ And bribery is in some circumstances a crime.
→ Duty not to use secret or confidential information
▪ E.g. A, a doctor concludes a contract of agency with B an experienced nurse to purchase
medical equipment from C on his behalf. In the contract A provides that B should purchase
all the equipment that B thinks are necessary for the surgery. And B will be paid for his
services. B happens to own shares at C a company that manufacture medical equipment
and A is not aware. B happens to get hold of a document that contains the marketing
strategy of A’s business that is doing exceptionally well. B shares this strategy with his
 friend who is also a doctor. B’s friend uses the strategy to market his business. B also sells
the document to an unknown doctor in his area of residence.
▪ Here B has breached his duty not to divulge the secret information of his principal and to
use the information for his benefit.

Duty to account to the principal

The agent has the duty to keep all the records pertaining to the agency so that he can properly account
to the principal.

Duty to keep the principal’s property including money separate from his own.
If the agent has any of his/her principal’s property (including money) in his/her possession, he/she must
keep them separate from his/her own.

Duty to return the principal’s property after the authority has ended or task executed.
If the agent has any of his/her principal’s property (including money) in his/her possession, the agent
must return these to the principal after his/her authority has ended.

Miscellaneous aspects of tripartite relationship

Relationship between the principal and third party.
 The relationship between the principal and the third party is governed by the contract between the
agent and the third party.
 This is provided the contract was concluded within the authority granted by the principal to the
agent.
 The principal is not bound by anything that is not in terms of express, tacit and ostensible authority.

Liability to third parties

▪ The principal will be liable for delicts committed by the agent if the agent is an employee of the
principal and the agent committed the delict (act that causes damage) while executing his tasks as
an employee.
▪ Or if not employee, if the agent committed the delict and the act was authorised by the principal or
the principal was aware of the act.

Relationship between agent and third party

➔ Generally, the third party and the agent do not have a relationship, meaning that there are no rights
and duties created between.
➔ However, there are circumstances where the agent will be liable to the third party:
o Absence of authority
- If the agent acts without authority or without the scope of authority and principal does not ratify, then
the agent will be liable to third party for damages suffered due to an unauthorised action.
- However, the agent will not be liable if the agent and the third party were:
• Under the false impression that the agent had authority
• The third party knew or should have known that the agent lacked authority.
o Express warranty
- Where the agent assured the third party that he has authority to act on behalf of the principal while
this is not the case, the agent will be in breach of warranty and liable for damages.
o Misrepresentations
- In the event that the agent misrepresents that he has authority and the third is induced or made to act
due to the misrepresentation, the agent will liable for damages to suffered by the third party.

Special types of principals

Non-existent principal
 The general rule provides that no one can conclude a contract on behalf of principal that does not exist.
 However, an exception is found in section 21 of the Companies Act 71 of 2008.
 The exception is known as pre-incorporation contract which means a contract concluded on behalf of a
company that does not yet exist.
 The aim of the provision is to avoid a situation where a company would lose a business opportunity
because it is not yet incorporated but will be incorporated in the near future.
 Section 21 provides that a person can conclude a written contract on behalf of a company that will be
incorporated later.
 The person or agent is jointly and severally liable for the duties in the contract if the company is:
- Not incorporated as planned (not formed or registered in terms of the law)
- After incorporation the company rejects part of the contract.
 However, where the company after incorporation rejects the pre-incorporation contract and concludes
another contract under the same terms or as a substitution of the pre-incorporation contract, the agent
will not be liable.
 Let’s look at an example.
- e.g Tim and Sam who engineering graduates are planning to incorporate a company that will create
innovate building material for low cost housing in the next two months and have identified affordable
material to manufacture their innovative building material. They approach the supplier and the supplier
indicates to them that the material will be sold anytime as they are highly sought by other entrepreneurs.
To avoid a situation where Tim and Sam’s planned company that is not yet incorporated to lose a lucrative
contract, they can conclude a pre-incorporation contract on behalf of the company.
Undisclosed principal
 Let’s use an example to explain this:
- A concludes a contract of agency with B for B to purchase farming automobiles on his behalf
from C. A requests B not to divulge his name to C due to security concerns. B concludes the
contract with C in his own name while acting as an agent for A an unnamed principal.
• Here the contractual relationship is established between the A and C and B and C.
• When the C discovers that B is an agent, C can decide which contract to rely on.

Special types of agents

Brokers and intermediaries providing financial services or advice
➢ e.g A is an agent of B a property owner at Mooikloof Rose Estate. A is tasked to conclude lease
contracts and execute other related matters on behalf of B with third parties (tenants).
➢ A is thus a property broker who is tasked by the principal B to conclude contracts on his behalf
with third parties.
➢ e.g A concludes a contract of mandate with B for B to invest A’s retirement payment with one
investment houses in the country.
➢ Thus B is a financial broker who is tasked by the principal A to conclude an investment agreement
on his behalf with the third party (Investment house).
➢ Any person who falls under the definition of a financial advisor or acts as an intermediary when
executing their duties (when assisting customers in stock, insurance and investment), their duties
and services and products are regulated by the Financial Advisory and Intermediary Services Act
37 of 2002.
➢ They should also Treat Customers Fairly (‘TCF’)

Estate agents
• The ESTATE agents are regulated by the Estate Agency Affairs Act 112 of 1976.
• However, there is Property Practitioners Act 22 of 2019 which has been signed by the present but
not yet in force.
• The date in which the latter Act will be in force will be communicate in the Government Gazette.
• The latter Act will repeal/replace the former Act.

Please study this part on your own as it is easy to comprehend paragraph 7.08 -719 of the textbook and
note that you may be tested or examined on it.
Textbook:

The Estate Agency Affairs Act 112 of 1976 (1976 Act) currently regulates various aspects surrounding
the activities of estate agents, but this Act will soon be replaced by the Property Practitioners Act 22 of
2019 (2019 Act) when the latter becomes operational. [The 2019 Act has already been signed by the
President, but at the time of writing it has not yet been put in force.] The discussion that follows provides
a brief overview of important aspects of the 1976 Act but indicates what the implications of the 2019
Act are.

The 1976 Act defines an estate agent as any person who holds himself out as someone who, or advertises
that he on behalf of someone else:

(a) sells or buys immovable property or business undertakings;

(b) leases or lets immovable property or business undertakings; and/or
(c) collects any money in terms of a lease of immovable property.

The definition of a property practitioner in the 2019 Act is broader than that of a typical estate agent,
but it essentially includes functions similar to those listed above. Both the 1976 and 2019 Acts provide
instances where persons are disqualified from acting as an estate agent or property practitioner.

Features of statutory framework

The 1976 Act created the Estate Agents Board for the purpose to maintain and promote the integrity of
estate agents, especially regarding their dealings with consumers. The 2019 Act will replace (but
continue the functions of) the Board with the Property Practitioners Regulatory Authority.

The 1976 Act also established the Estate Agents Fidelity Fund to which all estate agents must contribute
annually in order to be issued with a fidelity fund certificate, without which someone cannot lawfully
practice as an estate agent or receive remuneration for any such work. The moneys in the Fund are then
used to compensate persons who have suffered loss when his/her estate agent stole moneys entrusted to
the agent or collected by the agent on his/her client’s behalf. The 2019 Act will change the name of the
Fund to the Property Practitioner’s Fidelity Fund.

The 2019 Act adds a new feature that is not present in the 1976 Act, namely the Property Practitioner’s
Ombud Office. The purpose of this office will be to hear and resolve complaints against property
practitioners regarding the financing, marketing, managing, letting, hiring, sale and purchase of
property.

Estate agents are required, under the 1976 Act as well as the 2019 Act, to maintain one or more trust
accounts in which they must deposit all moneys received from or collected on behalf of their clients in
the course of fulfilling their duties as estate agents (property practitioners).
Duties of estate agent
The general task of an estate agent is to find a purchaser or lessee for the property that he/she was
mandated to sell or let on his/her client’s behalf. After fulfilling this task, he/she is entitled to the agreed
remuneration, typically in the form of commission (a percentage of the purchase price or rental). Since
the relationship between an estate agent and his/her client is generally based on the contract of mandate,
the estate agent is bound to the same duties as ordinary agents.

Unlike other agents, estate agents are not under an absolute duty to fulfil the task given by the principal.
The estate agent can, for instance, choose not to, or fail to, find a suitable purchaser, in which event
he/she simply will not be paid.

Remuneration of estate agents

The right to be remunerated for his/her services is usually made conditional, in the contract between the
estate agent and his client, on the former finding a buyer for the property. Determining exactly when
the client (principal) is duty bound to pay the agent is one of the most complicated issues surrounding
estate agents – especially if the agent is not the exclusive cause of the sale.

The first rule is that, if the estate agent is not in possession of a valid fidelity fund certificate, he/she is
not entitled to claim remuneration from his/her client, regardless of the terms of the contract. The next
step is to investigate the terms of the agreement between the estate agent and his/her client, as well as
the circumstances of the case, in order to determine if the agent’s actions are such that they trigger the
principal’s duty to pay the relevant remuneration.

If a seller had appointed more than one agent to find a buyer for his/her property, it may be difficult to
determine which of them must be paid when the property is sold – especially if both agents played,
perhaps at different times, a role in communicating with the buyer. The rule is that one must ask which
agent’s actions qualified as the effective cause of the sale. This will depend on the facts of each case.

Auctioneers
➔ These are special types of agents that are mandated to sell the property of their principals at public
auction on behalf of the principals.
➔ With movables, the auctioneer sells on behalf of the principal and receives payment for the
principal.
➔ With immovable, auctioneer sells but money is paid directly to the principal.
➔ In the absence of agreement on how the auctioneer will be remunerated, it is assumed that the
parties tacitly assumed that the auctioneer will be paid the usual remuneration in terms of trade
usage.
➔ The auctioneer cannot purchase or bid to purchase the property.
➔ Matters such as advertising of auctions, duties of auctioneers, prohibited conduct during auction,
and bidding procedures etc. are regulated by the Consumer Protection Act 68 of 2008 (‘CPA’) and
Regulations.

Company representatives
◆ Companies are juristic persons with no minds, hands or legs to conclude contracts. In other words,
they are not natural persons.
◆ Thus, section 66 of the Companies Act 71 of 2008 provides that directors have to the authority to
exercise all the powers and all the functions of the company, unless the Act and the Memorandum
of Incorporation (which is the constitution of the company) provides otherwise.
◆ Directors as a group are known as the board of directors and can delegate their power to one of the
directors or an employee to conclude contracts on behalf of the company.
◆ Authority can be express, tacit (read between the lines) or implied or ostensible.

Intermediaries in terms of the Consumer Protection Act (‘CPA’)

 Intermediary is a person who represents another in business for remuneration in the
- Supply of goods.
- Accepting property from another for the purpose of sale
- Offering to sell to a consumer, soliciting offers for selling to a consumer any goods or property
that belongs to another or service to be supplied by a third party.
- Section 27 and regulation 9 of the CPA provides that the agent must disclose certain information
to the principal or to the person he intends to deal with.
▪ Personal information
▪ All amounts due
▪ Services to be supplied
- The executors or administrators of deceased estates, liquidators of insolvent estates or trustees
of trust property are exempted.

Intermediaries in terms of the Financial Advisory and Intermediary Act 37 of 2002

 The Financial Advisory and Intermediary Act 37 of 2002 regulate the standards of service when
providing financial products and services.
 This Act will soon be supported or supplemented by the Conduct of Financial Institutions Act
(‘COFI’) which is still a bill at the moment (it is still in the process of being implemented).
 This is industry where financial products and services are provided is also regulated by Treating
Customers Fairly and also General Code of Conduct.
 Study paragraph 7.27 on your own to see what the COFI will aim to provide. Note that you may
be tested and examined on this. End of study unit 2
THEME 5: LETTING AND HIRING OF WORK

Important: The contract of letting and hiring of work is a specific contract because it has a set of

essentialia that differentiates it from other types of contracts. However, it remains a contract and the
basic rules and principles studied in syllabus theme 2 remain relevant for this type of contract as well.
There are also special instances relevant to contracts of letting and hiring of work which impact the

general requirements for a contract and as it is a specific contract, special requirements relating to
essentialia, naturalia and incidentalia.

SU 1: Conclusion of the contract

Learning material

1. Business Law chapter 16

2. Additional class notes

Learning objectives

At the conclusion of this study unit, you should be able to demonstrate your knowledge and
understanding of the contract of letting and hiring of work through your ability to:

1. Differentiate between the three forms of lease known to Roman law; specifically between the letting
and hiring of services (employment contract) and the letting and hiring of a piece of work (contract
of letting and hiring of work);
2. Explain the ordinary requirements of a valid contract of letting and hiring of work;
3. List and explain the essentialia of a contract of letting and hiring of work;
4. Differentiate between a contract of letting and hiring of work and a contract of purchase and sale;
5. Define a construction contract;
6. Explain the legal relationships and requirements, if any, between parties where subcontractors are
involved;
7. Define the parties involved in contracts of letting and hiring of work, with specific reference to the
subcontractor, architect, engineer, project and construction manager, landscape architect, quantity
surveyor and property valuer;
8. Name the professional or oversight bodies, where applicable, relevant to the architect, engineer,
project and construction manager, landscape architect, quantity surveyor and property valuer;
9. In respect of consensus as a general requirement for a contract of letting and hiring of work:
9.1 Explain the tender procedure;
9.2 Explain the operation of an option;
9.3 Explain time and place of conclusion of a contract of letting and hiring of work;
9.4 Discuss the factors that can influence consensus when it comes to a contract of letting and hiring of work;
10. Explain formalities, as a general contractual requirement, in the context of a contract of letting and
hiring of work;
11. Define, discuss and explain the following clauses in a contract of letting and hiring of work:
11.1 a “condition” and the difference between suspensive and resolutive conditions;
11.2 a “term” and the difference between suspensive and resolutive terms;
11.3 a right of rescission;
11.4 penalty clauses;
11.5 standing time clauses;
11.6 acceleration clauses, and clauses providing for early completion;
11.7 warranties;
11.8 support and maintenance clauses;
11.9 exclusion and limitation of liability clauses;
11.10 clauses on jurisdiction and costs;
11.11 common additional clauses found in contracts for letting and hiring of work;
12. State, and explain, the requirements for amendment of the contract with reference to case law;
13. Apply the abovementioned principles/law to relevant but unfamiliar scenarios to solve practical
problems.

Introduction
 The Roman law differentiated between three contracts of letting and hiring.
 Locatio conductio rei letting and hiring of an object.
 Locatio conductio operis letting and hiring of the piece of work. (Performance of professional services
e.g. Building a house or installing air conditioners).
 qazz letting and hiring of services also known as employment contracts.
 The difference between letting and hiring of piece of work or professional service and employment is
that in employment the employee performs the services under the control and supervision of the
employer and on the other hand in the contract of piece of work, the lessee performs the work and
complies with the requirements independently.
 These contracts also involve the law of mandate as the lessee or the contractor will be given a mandate
or instructions e.g. to build a house in exchange for compensation.
 Examples of contracts for the piece of work: Sam concludes a contract with Sarah a well-known builder
to build him a house at Mooilkloof Valley Farm.
 There are special rules that are applicable in these types of contracts.
 This study unit deals with such rules.

Definition of the contract of letting and hiring of work

(Completion of the piece of work)

 The contract for the completion of work is a mutual contract (give and take contract) where lessee
(contractor) undertakes to deliver a piece of finished work within the agreed time in exchange of
compensation by the lessor (client).
 E.g. Freddie concludes a contract with Jack a well-known builder for Jack to build a R 3 million rands
four bed room house for Freddie at Mooikloof Valley Farm within 8 months and for R 1.5 million rands
compensation.
Parties in the contract
 E.g. Let’s explain different types of parties in the contracts for the completion of work.
 Freddie (client or lessor) concludes a contract with Jack (contractor/lessee) for Jack to build him a
house within 8 months and for R 1.5 million compensation. Jack concludes a subcontract with Sim
(subcontractor) an electrician to install electric wires in the house and also with Sarah
(subcontractor/intermediary/advisor) a quantity surveyor to advise how much the project will cost
and how long it will take.
 Suppose the client or lessor is a juristic such as a company.
- We should describe the company according to its name and registration number not its Trade name. E.g.
Titno (Pty) Ltd with registration number (2020/123456/21) a hospitality company that trades as Luxury
Lodge (Trade name). When we describe such a company we have to use the company name and the
registration number.
- The company must be represented by an authorised agent as it is not a natural person.
- The Consumer Protection Act 68 of 2008 (‘CPA’) is not applicable where a juristic person makes a
turnover or has an asset value of R 2 million or more. Such a juristic person is not regarded as a consumer
in terms of the CPA. Thus CPA is not applicable and suppliers to such consumers are not required to
comply with the requirements of the CPA.

Subcontractors
➢ There are two types of subcontractors.
➢ Let’s explain the law with examples.
- E.g 1. Anna concludes a contract with Rose for Rose to build a house for Anna. The contract
provides that Rose can appoint any subcontractor to deal with all the work pertaining to
electricity. Rose appoints Sammy as subcontractor to deal with electricity work.
▪ In this example we see a selected subcontractor. Rose steps in the shoes of the client Anna in this
subcontract with Sammy.
▪ Here there is no automatic relationship between the client Anna and the subcontractor Sammy.
▪ Rose as the original contractor must make sure that Sammy a subcontractor completes proper
electrical work within the agreed duration.
- E.g 2. Anna concludes a contract with Rose for Rose to build a house for Anna. The contract
provides that Rose should appoint Zac a subcontractor to deal with all the work pertaining to
electricity. Rose appoints Zac as subcontractor to deal with electricity work.
▪ In this example we see a nominated subcontractor.
▪ The clause that provides for the appointment of subcontractor Zac is seen as a restraint of trade
against the original contractor Rose to comply with it. In other words, it is a clause that compels
Rose to act in a particular way. To appoint Zac in the performance or delivery of work.
▪ To know that a nominated subcontractor is really a nominated subcontractor, the court has provided
certain elements in the case of Minster of Public works and Land Affairs vs Group Five Building
 Ltd [1999] All SA 467 (A). Study the elements on your own on paragraph 16.07 and make sure you
understand them. Note that you may be tested or examined on them.
▪ All the elements are easy to follow except element (d) which says there is no privity (which means
you cannot claim in a contract where you are not a party) between the client and nominated
subcontractor. This means there is no automatic contractual relationship between the client and the
nominated subcontractor. This is the same as the relationship between the client and the selected
subcontractor.
▪ Note that the elements are provided to exclude any privity (contractual relationship where each
party can claim from the other) between the client and the subcontractor. However, client exercises
some control over the work of the subcontractor.
▪ The original contractor has no control over the selection and appointment of the nominated
subcontractor.
▪ In the case of a delay of the appointment of the nominated subcontractor, the client will be liable
for costs incurred by the original contractor.
▪ Original contractor is liable for default of selected and nominated subcontractors, but where the
default of the nominated subcontractor leads to delay in completion of the work on time; the original
contractor is entitled to the extension.
▪ If contract cancelled due to insolvency of the nominated subcontractor or default of the client or
agents of the client, then additional costs of completion of the work of the subcontractor will be
borne by the client.
▪ Regardless of the type of the subcontractor, where the original contractor fails to pay the
subcontractor, the subcontractor may exercise lien (right of retention) to the work completed.
▪ The client can conclude a settlement with the subcontractor and pay the subcontractor and set off
the money paid to the subcontractor when paying the original contractor. In other words, deduct the
money paid to the subcontractor from the money due to the original contractor.
▪ This will create a contract between the client and subcontractor and the original contractor will not
be party to such a contract.

Targeted procurement
Where government appoints contractors and where contractors appoint subcontractors these are known
as targeted procurement. There are specific provisions that apply to tender processes in specific
industries and these must be applied strictly.

Please study paragraph 16.10 on your own and note the work of the Council for Built Environment
established in terms of Council for Built Environment Act 43 of 2000. Study the purpose of the Act in
terms of section 3 on your own. Note that this part of the work is important and you may be tested and
examined on it. Please study this work on your own and note that you may be tested and examined on
this work.
Architect
For the architect please studies paragraphs 16.11 -12.

• Note what is an architect,

• Which piece of legislation regulates architects,
• Who qualifies to be an architect,
• What is the regulatory body that regulates architects and
• What is the purpose of the regulatory body?

Textbook:

An architect can be described as a person trained in the art of building and who is competent to design
buildings and to supervise the erection thereof. No person may work as an architect or receive any
remuneration for such work unless the person is properly qualified and is registered at the relevant
controlling body in terms of section 19 of the Architectural Profession Act 44 of 2000, and includes
professional architects, architectural technologists, architectural draughtspersons, or candidates
(persons in training) for these professions.

The profession is regulated and controlled by The South African Council for the Architectural
Profession, that issues and enforces rules for the qualification, duties and conduct of its members. It
also issues a Framework for Professional Fees Guidelines from time to time which is adapted on a
regular basis.

Engineer
For the engineer, please study paragraph 16.13 -14.

• What is an engineer
• Which piece of legislation regulates engineers
• Who must register as an engineer
• What is the regulatory body that regulates engineers
• What is the purpose of the regulatory body

Textbook:

An engineer cannot be easily described as the description would be so wide as to include many
professions, yet, may simply be defined as someone who designs, makes or builds a work of
engineering. Section 1 of the Engineers Profession Act 46 of 2000 merely states that an engineer is
someone who is properly registered as such with The South African Council for the Engineering
Profession. Persons who must register as such are professional engineers, engineering technologists,
certified engineers or engineering technicians, as well as candidates who are persons in training for any
of the above.
The profession is regulated and controlled by the Council that issues and enforces rules regarding the
qualifications, duties and conduct of its members. The Council issues Guidelines for the Scope of
Services and Tariff of Fees for the fees payable to persons registered under the Act, which guidelines
are amended from time to time.

The project and construction manager

For the project and construction managers study paragraph 16.15-16.

• What is a project and construction manager

• Which piece of legislation regulates project and construction managers
• Who must register as such
• What is the regulatory body
• What is the purpose of the regulatory body

Textbook:

A project and construction manager can be described as a person who manages, controls and supervises
the completion of an individual or group enterprise undertaken to complete a piece of work. A project
and construction manager is described in section 1 of the Project and Construction Management
Professions Act 48 of 2000 as a person who is registered as a project or construction manager in terms
of the provisions of section 19 of the Act, and includes a professional construction manager,
construction project manager and candidates (persons in training) for these professions.

The Act also provides for The South African Council for the Project and Construction Management
Professions that issues and enforces rules regarding the qualifications, duties and conduct of project and
construction managers. The Council also issues Guidelines for the Scope of Services and Tariff of Fees
for the fees charged by persons registered under the Act. The guidelines are amended from time to time.

Landscape architects
For landscape architects study paragraph 16.17 -18

• What is a landscape architects

• Which piece of legislation regulates land scape architects
• Who must register as land scape architects
• What is the regulatory body
• What is the purpose of the regulatory body

A landscape architect can be described as a practitioner of landscape architecture involving the planning
and designing of the open-air environment, with specific reference to the harmonious fitting of built
structures into the landscape. A landscape architect is described in section 1 of the Landscape
Architectural Profession Act 45 of 2000 as a person who is registered as a landscape architect in terms
of the provisions of section 19 of the Act, and includes professional landscape architects, landscape
technologists, landscape technicians or landscape assistants, as well as candidates (persons in training)
for these professions.

The Act also provides for the South African Council for the Landscape Architectural Profession that
issues and enforces rules regarding the qualifications, duties and conduct of landscape architects. The
Council issues a Professional Rates Table for the rates payable in the industry that is amended from
time to time.

Quantity surveyors
For quantity surveyors paragraph 16.19-20

• What is a quantity surveyor

• Which piece of legislation regulates quantity surveyors
• Who must register as a quantity surveyor
• What is the regulatory body
• What is the purpose of the regulatory body

Textbook:

A quantity surveyor can be described as a person who is responsible for the measurement and
compilation of schedules of quantities for a set of plans drawn by an architect to enable the builder to
properly execute the building works according to the plans. A quantity surveyor is described in section
1 of the Quantity Surveying Professions Act 49 of 2000 as a person who is registered as a quantity
surveyor in terms of the provisions of section 19 of the Act, and includes professional quantity surveyors
and candidate quantity surveyors.

The Act also provides for The South African Council for the Quantity Surveying Profession that issues
and enforces rules regarding the qualifications, duties and conduct of quantity surveyors. The Council
issues a Guideline Tariff of Professional Fees for the fees charged by persons in the industry which is
updated on a regular basis.

Property valuer
For property valuer study paragraph 16.21 -22

• What is a property valuer

• Which piece of legislation regulates property valuers
• Who must register as such
• What is the regulator body that regulates property valuers
• What is the purpose of the regulatory body
Textbook:

A property valuer can be described as a person who is responsible for the valuation of properties in
order to determine the material or monetary value of a house or piece of land. The property valuer is
described in section 1 of the Property Valuers Profession Act 47 of 2000 as a person who is registered
in terms of the provisions of section 19 of the Act.

The Act also provides for the South African Council for the Property Valuers Profession that issues and
enforces rules regarding the qualifications, duties and conduct of property valuers. The Council issues
a Guideline for Professional Fees that is amended from time to time.

Conclusion and contents of contracts

Conclusion of the contracts
❖ All five requirements of valid contract must be complied with.
- Consensus
- Contractual Capacity
- Legality
- Possibility and Certainty
- Formalities

Consensus
 Consensus is reached when one of the countless offers by offerees is accepted.
 In construction contracts the client can conclude a contract with a specific contractor or through
private or public tender.
 Tenders, letters of intent and memorandums of understanding:
→ Tender process: let’s use an example.
o E.g. Jan invites builders to provide proposals (Request for proposals) to build him a mansion. John,
Sarah and Sim send their respective proposals to Jan.
o Here the three builders by providing proposals are making offers to Jan.
o The invitation is just a mere advertisement.
o The invitation may provide terms and conditions that the offer must contain or comply with.
o The person inviting offers may accept tenders that do not comply with requirements or terms.
o And a mere offer that is not accepted by the addressee or the person who invited tenders does not
create rights and duties.
o However, in rare situations invitations to tenders may amount to offers provided:
- Where it states that the highest or lowest tender will be accepted.
- Where it states that the offer that gets highest points in terms of matrix points will be accepted.
- Where the invitation contains all the terms of the tender.
- The requirement is that the invitation should be an unqualified undertaking to be bound by the
offer.
 → Participation in a tender process and sending of offers indicate that the party accepts the offer
and enterers into a contract with other parties in the process with respect to the ‘rules of the
game’.
→ The law that regulates tenders with the state must be strictly complied with.
→ The courts may set aside tenders that are concluded based on dishonesty.
→ Memorandum of association
o Memorandums of associations are documents that reflect consensus between parties.
o They provide speedy basic legal obligations between parties.
o They are binding contracts.
o They can be replaced by subsequent contracts by parties or terms may be added to them
by parties.
o Where parties should provide pieces of work from time to time, MOA’s are binding
contracts.
o And each subsequent arrangement for the completion of specific piece of work will create
a separate contractual agreement.
o Where parties want to formalise the interim or basic agreement and determine the wording
of contractual terms and conditions in the future, such contract is a separate contractual
agreement.
o Where the final contract requires certain formalities such formalities are applicable to the
interim or basic contract.
→ A letter of intent
o A letter of intent is a communication by one of the parties to the other which can be:
invitation, offer or acceptance.
o This will depend on the content and purpose of communication.
o In some instances, the letter labelled as letter of intent will be a complete
o binding contract between parties.

Options
Let’s use an example to explain what an option is: e.g Sarah offers to build a house for Tim for R 2
million rands. Sarah provides that the offer to build the house will be opened for the next 11 months.
This is an option granted to Tim.

 This is an option to Tim.

 Note that irrevocable/irreversible offers can also be made.
Time and place of conclusion of contract
 The general rule is that information theory is applicable which provides that the contract will be
concluded when and where the person who made the final offer becomes aware that the offer is
accepted by the offeree.
 This means that the contract will be concluded at the time and place where the offeror gains
knowledge that the offer has been accepted.
 Exceptions to the general rule:
- Where both parties used contemporary electronic media (sms, WhatsApp, television, websites
or ED) reception theory is applicable. This means that the contract will be concluded when
acceptance of the offer is received and able to be processed in the information system of the
addressee of acceptance. This will usually be at the residence or place of work of the
addressee/offeror.
- Expedition theory is applicable where the offer and acceptance are sent by old fashioned post.
The contract will be concluded when and where the offeree sends the letter of acceptance.
- However,
• Parties may agree on the time and place of contract.
• They may also agree on the specific theory to be used.
• The offeror may prescribe a specific method of delivery of acceptance.
• Where there is a signature, this may mean that the time and place of last signature is time and place
of the conclusion of the contract.

Essentialia
e.g. Ali concludes a contract with Sylvia for Ali to build a house for Sylvia.

(a) The parties must agree that Ali will complete a piece of work for Sylivia (build a house).
 The material to be use in the building the house must belong to Sylvia the client or in a contract
for a service, such as fixing the car, the car must belong to Sylvia.
 Ali may also purchase building material for Sylvia and his account will reflect as such and Ali
will be reimbursed.
 Ali will also be compensated for the work done.
 In circumstances where Ali uses his own material to build a house for Sylvia this may be a
contract of purchase and sale with respect to building material.
 Intentions of the parties will dictate as to which contract they intended to conclude.
 Intellectual property rights vests on the client upon completion and acceptance of the work
unless there is a contract between the parties that states that rights belong to the contractor but
use of work is vested on the client.
 Note the scope and description of the word ‘services’ in the cpa to determine whether cpa is
applicable. See what the word ‘services’ include in the context of construction contracts.
STUDY THE SIX CIRCUMSTANCES THAT ARE COVERED BY THE WORD SERVICES IN
TERMS OF CPA IN YOUR OWN WORDS. YOU MAY BE TESTED OR EXAMINED ON THEM.

Textbook:

“Service” includes but is not limited to, in the context of construction contracts:
(1) any work or undertaking performed by one person for the direct or indirect benefit of another;
(2) the provision of education, information, advice or consultation, except advice that is subject to regulation by
the Short-term Insurance Act 53 of 1998, the Long-term Insurance Act 52 of 1998 and the Financial Advisory
and Intermediary Services Act 37 of 2002;
(3) the transportation of persons or any goods;
(4) the provision of accommodation or sustenance, any entertainment or similar intangible product or access
thereto, access to any electronic communication infrastructure, access or of a right to access to an event or
to any premises, activity or facility;
(5) a right of occupancy of, or power or privilege over or in connection with, any land or other immovable
property other than in terms of a rental; and
(6) rights of a franchisee in terms of a franchise agreement, irrespective of whether the person promoting,
offering or providing the services participates in, supervises or engages directly or indirectly in the service.

(b) Ali must complete the work independently from Sylvia.

(c) The building must be completed within agreed or reasonable time.

(d) Remuneration must be paid by Sylvia to Ali as counter performance against the building of the
house by Ali.

Factors that influence consensus

◆ Error will definitely influence consensus between parties.
◆ e.g Sam concludes a contract of sale of the house with Jack a well-known builder and Jack is under
the impression Sam concluded a contract for him Jack to build Sam a house.
- This is error of the nature and content of the contract.
- Error must be serious and reasonable before it can influence a contract (iustus error).
- This will render the contract null and void.
- Suppose Sam indeed concludes a contract with Jack for Jack to build him a house because he
erroneously (mistakenly) thinks that his house has burned down. This error by Sam will not
influence the contract as it is error in motive.
◆ Misrepresentation, duress, undue influence and bribery will also influence consensus. The contract
will be voidable at election of the prejudiced party.
◆ Section 40 and 41 of the CPA prohibits unconscionable conduct from the supplier or contractor.
- Unconscionable (unacceptable) conduct affects consensus and enforceability of the contract.
- The unconscionable conduct makes the contract voidable at the election of the party who
suffered prejudice.
- Misrepresentation is usually seen where the contractor misrepresents that has a certain skill
expressly or tacitly (words or conduct) or where a party fails to remove a false impression that
he has a certain skill and renders the contract voidable.
- Misrepresentation, duress, undue influence, bribery and unconscionable conduct that is
intentional or negligent raises a delictual action and delictual action is separate from the voiding
of the contract.

Contractual capacity, legality, and physical possibility are applicable in this contract.

Formalities
 No formalities are prescribed; however, Alienation of Land Act 68 of 1982, Housing Consumers
Protection Measures Act 95 of 1998, and Consumer Protection Act are relevant.
 Contracts may be concluded expressly or tacitly, verbally or in writing.
 In contracts with government notice should be made to additional statutory requirements e.g.
tender process, formalisation of contracts, contents and delivery of performance.
 Sufficient information about these contracts must be gathered as it may influence contractual
relationship.
 Writing is not a formality for conclusion of contracts in the context of construction, engineering or
professional services contracts.
 Parties can agree that a written contract is a requirement for formation of a valid contract or a
written contract is a proof of existence of the contract.
 Construction contracts are usually in writing.
o They contain many documents.
o Annexures, appendices etc
o Plans, schedules etc.
o They have standard terms and conditions.
o They also have special terms and conditions that are adapted to suit the project of the parties.
o Invitation of tenders may also be part of the contract.
 A clause on the order of precedence (which clause takes precedence in case of conflict of clauses)
of clauses should be provided in case there is a conflict between the clauses provided by the
documents which form part of the contract.
 And this should be drafted carefully.
 Parties may include the following clause.
 E.g The clauses in annexure 1 take precedence in case of conflict with other clauses from the
documents that form part of the contract.
o Written contracts are concluded on the date of signature.
o Parties may use distinguishable marks or initials.
o Wording before signature is not a requirement.
o Witnesses’ signatures may be provided but not a requirement unless parties agree otherwise.
o Initialling each page or amendment is not required but important in determining which pages were
present when the contract was signed and not changed at a later stage.

Contents of the contract

Essentialia, naturalia and incidentialia
 Here we are dealing with terms and conditions of contracts known as contractual provisions.
 All construction contracts must contain all essentiallia of the contract.
 As a specific/nominate contract there are terms that are applicable by operation of the law (naturalia).
 The latter terms may be excluded by incidentialia.
 Other terms suitable to parties may be added by incidentialia.
 The limitation of CPA must be noted as it creates the consumer’s right to fair, just and reasonable terms
and conditions.

Conditions
➢ A condition is a clause that determines the enforceability or the continued existence of the contract
and depends on an uncertain future event.
➢ Suspensive condition
- e.g. A concludes a contract with B for A to build a house for B on B’s land on condition that B
secures a loan within the next 3 months.
▪ The securing of loan suspends the enforceability of the contract. The contract will only be enforced
only when B secures the loan within the next 3 months.
➢ Resolutive condition
- e.g. A concludes a contract with B for A to build a house for B on B’s land for a period of 2
years and the contract will be terminated on condition that one of the parties becomes insolvent.
▪ The contract is enforceable and continues to exist until one of the parties becomes insolvent.
▪ Insolvency condition serves to dissolve the contract.
➢ Condition precedent
- e.g A concludes an insurance contract with B wherein A insures B property against theft. Theft
is the condition precedent that must occur before A can be required to pay the value of B’s
stolen property.
▪ This is a suspensive condition in that suspends obligation of parties to perform until the occurrence
of an uncertain future event.
Time periods (terms)
 This is where the enforceability and continued existence of the contract depends on certain future
event.
 Suspensive term
- e.g. Sim concludes a contract with Tim for Tim to build Sim a house for a period 3 years. The
parties agree that contract will only be enforceable next winter.
 Resolutive term
- e.g. Sim concludes a contract with Tim for Tim to build Sim a house for the next 6 years. The
parties agree that the contract will be terminated if Sim dies.

Rights of rescission or cancellation

▪ Lex commissoria is a clause that grants the party who has suffered damaged due to a breach of
contract to cancel the contract no matter how small the breach maybe.
▪ Lex commissoria allows the party who has suffered damage due to breach to cancel regardless of
the fact that common law is applicable.
▪ In practice the party who has suffered due to breach of contract may give notice to the other to
rectify the breach.
▪ CPA provides that the supplier may cancel 20 days after the granting of notice of breach where the
consumer has failed to rectify his breach.
▪ This means that parties in the contract should include lex commissorio.

Penalty clauses
 Parties must include penalty clauses in their contracts as it is cumbersome and time consuming to
claim damages without such penalty clause.
 These clauses also prevent parties from committing breaches as they will know the amount of
penalty in case of breach.
 Parties will also act with care because of penalty clauses.
 The client can deduct or set off penalties from the money due to the contractor.
 This can be done during the contract.
 Penalty clauses are regulated by Conventional Penalties Act 15 of 1962
- Section 2 provides that common law damages and stipulated penalties cannot be claimed
(cumulatively) one after another but alternatively (one or the other).
- Where penalty clause is present in the contract it replaces the common law damages, unless
parties agree that parties may choose which damages to institute or claim.
- The latter will help where damages were undervalued in the penalty clause.
- Section 2(2) states that a party cannot keep the faulty performance and claim damages unless
the contract expressly provides that.
- Section 3 provides that a court can reduce the penalty if the amount exceeds the actual damage.
Standing time clauses
 E.g A concludes a contract with B for A to build a house for B and the parties agree that should B
fail to prepare the land on which A should build, B will incur a penalty for all the wasted costs.
- This is a standing time clause.

Substitution of contractor clauses

 e.g A concludes a contract with B for B for build a house for A. The parties agree that in the event
that B’s work is unsatisfactory A can stop the contract and appoint another contractor to finish the
work and B will be liable for compensation of the substitute contractor and all additional costs.
- This clause ensures that the client receives his specific performance (house).
- And does not commit a breach when stopping the contractor from continuing with
unsatisfactory work.

Acceleration clauses and clauses providing for early completion

 Acceleration clause
- E.g. A concludes a contract with B for B to build a house for A. Parties agree that in case of
breach by one of the parties, all amounts that should be paid in future will become due
immediately.
- This is punishment for breach.
 Clauses providing for early completion
- E.g. A concludes a contract with B for B to build a house for A for 12 months. In the contract
parties agree that B will receive a bonus if he completes the house with 9 months.
- The client and contractor can agree that the contractor speed up the work in exchange of
additional payment.

Warranties or guarantees
e.g A concludes a contract with B for B to build him a house and B guarantees that the roof of the house
will not leak for the next 10 years. 3 years later the roof leaks.

 B should rectify his malperformance within agreed time or reasonable time at his own cost.
 Guarantee is given after delivery of performance and is also included in the costs of the project.
 Guarantee should be distinguished from support and maintenance which is about repairing normal
wear and tear.
 CPA creates two tacit warranties which are warranty of quality and the warranty on repaired goods.
These will apply if the Act is applicable.
 Parties can include a support and maintenance clause in the main contract or conclude a separate
contract.
Exclusion and limitation of liability clauses
e.g A concludes a contract with B for B to build a house for A and the parties further agree that B will
only be liable for damages amounting to 20% of the total costs of the project for negligence. Or B will
not be liable for negligence in the contract.
 Limitation or exclusion of liability for intentional breaches is not possible.
 Courts do not approve of these clauses and will interpret them restrictively.

Clauses on Jurisdiction and costs

➢ In international agreements it is important to have a clause on which law (which country’s laws)
will be applicable in case of a dispute and who is liable for costs and at which scale.
➢ Attorney and client (costs payable by client to attorney) costs or party and party costs (costs from
date of summons).
➢ Alternative dispute resolutions should be considered especially arbitration as litigation is
detrimental (expensive and time consuming) to the parties and their relationship.

Implied terms
❖ These are terms that are applicable by operation of law or trade usage.
❖ They can be excluded expressly.
❖ They are not mentioned by parties.
❖ Implied terms that are applicable by operation of the law in contracts for completion of work:

Textbook:

Some contractual terms can form part of a contract either by operation of law or because of trade usage,
therefore, as naturalia, even where the parties do not mention these clauses specifically. Parties can
exclude such terms through express agreement. Implied terms that will apply specifically to contracts
for letting and hiring of work are the following:

 Where no time performance has been agreed on, performance has to be made within a reasonable
time.
 The client must co-operate in such a manner as to enable the contractor to complete the work and
to deliver it to the client.
 The client has to provide the contractor with access to the site within a reasonable time and the
contractor has to commence with the work within a reasonable time after gaining access to the site.
 The contractor tacitly undertakes to complete the work with the necessary degree of skill, care and
diligence, and to use suitable material of sound quality and fit for the purpose of the work, for
example, a builder has to build on reasonably effective foundations and use the necessary stable
landfill.
 The contractor has to comply with all statutory provisions that apply to the specific trade or piece
of work, even where it causes the contractor to do additional work for which the contract does not
provide.

 The contractor carries the risk for any loss or damage caused to the work in progress because of
force majeure, unless the damage is caused by instructions issued, or materials supplied, by the
client or by the actions of the client, or someone for whom he/she is responsible, such as an
employee or agent. The risk passes to the client once he/she accepts the work as completed. The
parties may contractually agree on who carries the risk and when the risk will pass to the client. It
is important for the party who carries the risk to take out sufficient insurance cover to cover his/her
liabilities. These naturalia may be amended, limited or even extended by an express agreement to
that effect between the parties.

These naturalia terms may be amended, limited or extended by parties.

Tacit terms
• These are unexpressed terms that come or are inferred from common intention of the parties from
expressed terms of the parties.
• The ‘in between the lines’ terms.
• The applicable test to determine whether a term is a tacit term that can be inferred from the
expressed terms and surrounding circumstances is the ‘hypothetical bystander test or but of course
test’.
• The question will be posed whether a reasonable bystander will regard the term as tacit, if the
answer is ‘of course yes’, then the term is a tacit term.
• Where contracts contain ambiguous terms rules of interpretation of contracts will be applicable.

Common additional clauses

In addition to the clauses discussed above most contracts for letting and hiring of work contain some
clauses covering the following aspects: passing of the risk, insurance, time and method of payment,
interest on overdue payments, payment in foreign exchange, testing or acceptance procedures of the
work, acts of God or force majeure, provision of tools and equipment, transfer of ownership and transfer
of intellectual property rights (so-called “IP”), forfeiture clauses in the event of breach of contract,
liability to third parties, non-disclosure of confidential information, the provision of securities, and the
formalities for the issue of proper notice. The list is not exhaustive.
Amendment of the contract
In terms of Alfred McAlpine case:

 Parties may need to amend the project.

 Formalities that are complied with when concluding the contract need to be complied with when
amending the contract.
 Written contracts have non-variation clauses.
 The latter may provide that the contract should be amended in writing and signed by both parties.
 This clause will provide that the written agreement is the only source of the contract.
 This clause is automatically enforceable unless it offends public policy.
 In circumstances where instruction is changed by the client to the extent that the change is a
substitution of the contract, the subcontractor can claim reasonable and fair remuneration for the
work done.

In terms of the Hawkins case

→ In circumstances where parties have agreed that the client can instruct the contractor to do
additional work.
→ The contract in these circumstances contains agreement on the basis of compensation for additional
work.
→ The latter is known as change variation order.
→ The contractor cannot refuse to do the work.
→ Where the contract is silent, this will be treated in terms of the original contract and will be seen
as an amendment of the contract.
→ Unless parties had the intention to form a separate contract.
→ The contractor will be entitled to fair and reasonable remuneration.
→ A change variation can also be an instruction not to deliver as initially agreed.
SU2: Performance in terms of the contract

Learning material

1. Business Law chapter 16

2. Additional class notes

Learning objectives

At the conclusion of this study unit, you should be able to demonstrate your knowledge and
understanding of the contract of letting and hiring of work through your ability to:

1. Explain, and differentiate between, implied and tacit terms in the context of the contract of letting
and hiring of work; (See this in Study unit 1)
2. Explain the duties of the lessee (contractor);
3. Discuss the remedies available to the lessor (client) upon breach of contract by the lessee;
4. Explain the duties of the lessor (client);
5. Explain the requirements, contents and consequences of certificates, with reference to case law;
6. Discuss the remedies available to the lessee (contractor) upon breach of contract by the lessor;
7. Explain risk in contracts of letting and hiring of work;
8. Explain the vicarious liability of the lessor;
9. Apply the abovementioned principles/law to relevant but unfamiliar scenarios to solve practical
problems.

Duties of parties
Duties of the contractor
Initial duties
 The contractor must carefully examine the environment where the work will be done in line with
the type of work that is required.
 The contractor must properly plan the work.
 All securities such as suretyships and guarantees must be given within the agreed time.

Completion of work
 The contractor must complete the work.
 The contract provides a tacit term that the contractor has the required expertise and that she will
complete the work with the required care (act in a manner that a reasonable professional would
act) and skill.
 The work must be accepted by the client or architect or engineer helping or representing the client.
 The work must be completed within the agreed time limits.
 Natural occurrences will lead to extension of time if they delay the work.
 If the client delays the contractor, time will be extended but the client will be liable for wasted
costs.
 If no time is stipulated, work must be completed within reasonable time.
 In the latter circumstances, the contractor will only be in breach if warning is given to him to
deliver within a certain time. In other words, mora ex persona is applicable.

Completion of additional work

o There is no obligation on the contractor to do additional work.
o Hawkins case.
o Where he does do additional work he will claim compensation in terms of the additional contract.
o If additional contract is not available, then he will claim in terms of unjustified enrichment.

Repairing defects and maintenance and support

 Where there are defects the client may request the contractor to repair them.
 Where e.g Sam concludes a contract with Billy for Billy to build Sam a house. In the contract Billy
guarantees that the roof will not leak within the next 10 years.
 This means that Billy will have the duty to repair the roof within the next 10 years if it leaks.
 Note Billy will also have to provide a warranty of repaired roof in terms of the Consumer Protection
Act.
 Billy will have the obligation/duty to support and maintain the house only if the parties have
expressly agreed.
 The latter can be in the main contract or in terms of the separate contract.
 Final duties
- Where e.g Sam concludes a contract with Billy for Billy to build Sam a house.
o After all the work is done, Billy the contractor must hand over the work done to the client.
o Billy must vacate
o Billy must leave the clients site as he found it.
o Remove all the tools.
o Hand over all the documents used in building the house.
o Provide receipts
o In some instances provide an account of all the monies received.

Failure to comply with the contractors duties

Breach of contract
➢ Let’s use an example to explain breach of contract and remedies.
➢ All other principles relating to breach of contract are applicable here.
➢ e.g Sam concludes a contract with Billy for Billy to build a house for Sam. While Billy is busy
working Sam realises that Billy is not following the plan of the house. There is a substantial
difference between the plan and the actual structure that Billy is building for Sam.
- Billy is breaching the contract and to be specific he is rendering positive malperformance.
- Sam has three remedies which are specific performance, cancellation and damages.
 • With specific performance courts are reluctant to grant it as it difficult to enforce. Sam will have
cancellation, damages, retention of retaining fees (percentage of money retained by the client from
the money due to the contractor to ensure that the contractor completes the work), and appointing a
substitute contractor at his disposal.
• With cancellation – Sam cannot cancel immediately unless he has:
→ Lex commissoria or cancellation clause.
→ Time is off essence and acquires right to cancel by giving proper notice in the event of mora
debitoris and mora creditoris.
→ Malperfomance or repudiation must be material.
→ Cancellation is also the only remedy where a party has made it impossible to perform.
→ The latter is impossible where the party who made the restitution impossible wants to cancel.
→ A party may cancel only if restitution was made impossible due to no fault of his or her.
→ See CPA where return of goods by consumer is prohibited and the right of the consumer to
return goods.
• With damages
→ Sam can claim contractual damages that should place him at the position he would have been
if the contract was not breached.
→ Or if the latter is not possible, Sam can claim damages that would place him in a position he
would have been had the contract not concluded.
→ Damages can also be costs of appointing a substitute contractor. The difference between the
breaching contractor’s costs and the costs of appointing the substitute contractor to complete
the work.
→ Special or consequential damages that arise due to the breach are assumed to be too remote
unless special circumstances are present.

Additional remedies
◆ Let’s continue to use this example to explain additional remedies.
◆ Sam concludes a contract with Billy for Billy to build a house for Sam. While Billy is busy working
Sam realises that Billy is not following the plan of the house. There is substantial difference
between the plan and the actual structure that Billy is building for Sam.

Retaining of fees
 Sam can retain monies due to contractor to repair the damage done due to breach.
 Also exceptio non adempleti can be used in a reciprocal contract where Sam retains (counter
performance) monies due to Billy until Billy rectifies his breach.
Substitution of contractors
 To ensure that Sam gets the specific performance as stipulated in the contract (the house),
substitution of the contractor remedy can be used if included in the contract.
 Sam can stop the work and order Billy to vacate his premises.
 Sam can then appoint the substitute contractor to complete the work.
 Usually these clauses contain a penalty clause that stipulates that the defaulting contractor will be
liable to compensate the appointment of the substitute contractor and all additional costs that will
be incurred by the client to exercise this remedy.
 Thus, as per this clause, Billy will be liable to compensate the substitute contractor and also for
additional costs.

Other contractual remedies

 In this case Sam can use penalty clauses in the contract and securities given by Billy for proper
work.
 Sam can include a forfeiture clause that will effectively vest ownership of all movables owned by
Billy to Sam until Billy performs properly.

Delictual claim
 Alternatively Sam can use the delictual claim to claim damages from Billy. This cannot be used
cumulatively with other remedies.
 He will have to prove that Billy acted (failed to follow the plan)
 Billy’s action is wrongful (unfair to Sam)
 Billy has fault (acted negligently)
 Billy’s action legally caused damage to him.
 Sam suffered damage as a result of Billy’s action

Duties of client
e.g Sam concludes a contract with Billy for Billy to build a house for Sam.

Initial duties
➔ In a contract such as this Sam must grant Billy access to the site where work will be done, all the
plan and specifications and tools required to finish the work.
➔ Billy’s duty to repair lapses as soon as work is approved unless parties agree otherwise.
Approval of the completed work: Issuing of certificates
 The approval of work completed by Billy will be provided in the certificates that will be issued by
Sam’s architect or engineer.
 There are three certificates.
 Initial certificate will be issued when Billy has completed a portion of work and Sam approves.
 Penultimate certificate issued by Sam within three months after work is completed but there are
outstanding documents.
 Final certificate will be issued by Sam within three months after work is completed and is a proper
evidence that work is properly completed.
 The requirements of the certificate
- Only issued by an authorised person.
- Written or verbal certificate may be issued unless parties agreed that written is required.
- Certificate may be issued conditionally.
 The certificate is a liquid document that indicates an acknowledgment of debt by the debtor Sam
on which provisional sentence may be issued by court. The certificate must include the amount
owed by Sam as debtor to Billy.
 The certificate is a liquid document which means that it is sufficient proof that Sam owes Billy an
amount of money that is determined or determinable.
 The provisional sentence procedure is an expedited legal procedure that is available for plaintiffs
armed with liquid documents. The process is without the delay found in the normal trial process.

Textbook:

In Smith v Mouton [1977 (3) SA 9 (W)] the legal consequences of a certificate were summarised as
follows:
(a) The architect or engineer who issues the certificate acts as the representative of his/her principal,
the client.
(b) The principal is bound to such a certificate as if he/she had signed it him-/herself.
(c) The client is not entitled to attack the validity of the certificate on the grounds that it was issued
negligently or that the representative did not exercise his/her discretion properly in issuing the
certificate.
(d) Where the certificate has been issued for defective work or for an excessive amount, the architect
or engineer who issued such a certificate negligently or intentionally will be liable to the client for
damages.
(e) All defects must be repaired before the final certificate will be issued and retention fees repaid.
(f) If the contractor sues a client for payment on the strength of a certificate, the client may defend the
claim by proving that no payment is due to the contractor because of defective material or improper
performance.
Duty to pay
E.g. Sam concludes a contract with Billy for Billy to build a house for Sam.

 In a contract such as this one where performance is indivisible payment or remuneration for Billy
is due when work is completed or Billy and Sam can agree on pro rata or periodic payments.
 Where Sam and Billy do not agree about payment and where Sam accepts the delivery of the house
a tacit agreement is that Sam is liable to pay Billy for work done and reasonable and fair
remuneration will be payable.
 Where Billy performs partially in a contract of this nature which is reciprocal and indivisible, Sam
can withhold his performance in terms of exceptio adimpleti contractus until Billy performs in full.
 This will be costly to Billy where Sam will use the partial performance.
 In the BK Tooling case the court held that in cases where the contractor performed partially he will
be entitled to a reduced price if he can prove that:
 The client uses the partial performance or defective performance.
 There are circumstances that make it fair for the court order a reduced payment to contractor and
 Also the extent of the payment.

E.g. In circumstances where A concludes a contract with B for B to build a house for A . When B is
busy building the house, A’s land is badly damaged by an earth quake and B is no longer able to build.

 In this case the risk is borne by B as the contractor unless parties agree otherwise.
 Where parties agree that A as client carries the risk, then A owes B for unjustified enrichment for
the work done.
 A will owe B fair and reasonable remuneration (quantum meruit).

E.g. In circumstances where A concludes a contract with B for B to build four units at A’s land for A.
While B is busy with the last unit the land where the last unit should be built is badly damaged by an
earth quake. A accepts the 3 units.

 In this case B the contractor is entitled to the pro rata (reduced price) payment for work done (for
building 3 units instead of 4).

Failure to comply with clients duties

e.g A concludes a contract with B for B to build four units at A’s land for A. While B is busy building
A fails to make pro rata payments as stipulated in the contract.

 What remedies does B as contractor have?

- Specific performance (pro rata payments)
- Cancellation
- Damages
 - Apportionment of Damages Act 34 of 1956 should be noted here.
 Where damages are caused by a party to another, the innocent party’s contribution is also
considered when quantifying the damages caused by the defaulting party. This applies to
delictual claims and not in contractual claims.
- B as a contractor is entitled to lien or right of retention of the work done and until A the client
pays the pro rata payments.
- A cannot take possession of the work done until he performs in full.
- The parties may agree on other remedies available to the client above.

Miscellaneous matters
Risk
➢ The risk of damage by acts of nature and conduct of third parties is borne by the contractor until
he hands over the work.
➢ However, parties may agree that risk will be borne by the client earlier or later.
➢ Parties must also agree that the party who bears risk should take insurance.

Vicarious liability
 Generally the client is not vicariously liable for the damages caused by the contractors. This means
that he is not responsible for damages caused by the contractor as is the case in the contract of
employment where the employer is responsible for damages caused by his employees.
 However, the exceptions are:
→ When the client requests the contractor to do dangerous work that will lead to damages to third
parties and there are no preventative measures taken.
→ Where the is a duty of the client to prevent damage to third parties and the client fails.
SU 3: Miscellaneous matters

Learning material

1. Business Law chapter 16

2. Additional class notes

Learning objectives

At the conclusion of this study unit, you should be able to demonstrate your knowledge and
understanding of the contract of letting and hiring of work through your ability to:

1. Describe the impact of the Consumer Protection Act 68 of 2008 on contracts of letting and hiring
of work;
2. Define and explain (and where applicable, differentiate between) various types of contracts of
letting and hiring of work: lump sum or fixed price contracts – “FP contracts”, admeasurement
contracts, cost contracts, and various pro forma contracts (NEC, JBCC, FIDIC and GCC contracts);
3. Discuss the specific methods of termination of the contract of letting and hiring of work;
4. Apply the abovementioned principles/law to relevant but unfamiliar scenarios to solve practical
problems.

Please study the content of this study unit on your own and note that you may be tested and examined
on it.

Prescribed study material: Paragraph 16.92 – 16.110 of the textbook

Describe the impact of the Consumer Protection Act 68 of 2008 on contracts of letting and hiring
of work.

➔ In the discussion of Study unit 1 and 2 please study the impact of the Consumer Protection Act 68
of 2008 in the contracts of letting and hiring of work.

Define and explain (and where applicable, differentiate between) various types of contracts of
letting and hiring of work: lump sum or fixed price contracts – “FP contracts”, admeasurement
contracts, cost contracts, and various pro forma contracts (NEC, JBCC, FIDIC and GCC
contracts)

➔ Study the different types of contracts of letting and hiring of work on your own.
➔ Study the various pro forma contracts on your own.

Discuss the specific methods of termination of the contract of letting and hiring of work

➔ Note that other methods of termination are applicable:

- Notice where parties have agreed as to when the contract may be terminated in this manner where one
party unilaterally sends notice of termination to the other.
 - Agreement where one party relinquishes his rights against the other party in the contract. The other must
agree to do the same.
- See how resolutive terms terminate contracts in Study unit 1 of this theme.
- Compromise is a substitute of an existing contract which may be unfair to one of the parties with a new
settlement contract.
- Prescription which is a lapse of time within which a party can claim performance due to her. In contracts
of letting and hiring of work it is three years after the date of the claim or when the plaintiff gains
knowledge about the claim.
- Insolvency (natural persons) and liquidation (juristic entities) terminates contracts. Insolvency where
one’s liabilities exceed assets and unable to pay debts. Trustee of the estate may decide to terminate or
keep the contract. If he terminates, the other party in contract becomes a creditor.

Textbook:

Miscellaneous matters
Risk
The contractor carries the risk for damage or loss caused by force majeure (uncontrollable
circumstances not caused by the fault of any party to the contract, including so-called Acts of God,
forces of nature and conduct of third parties) during the project, until the client accepts the work and
takes possession thereof. The parties can agree that the risk passes to the client earlier or at a later stage.
It is important to note that any party subject to a risk should ensure that proper insurance against that
risk is obtained. The parties, therefore, also often agree in their contract that insurance cover has to be
obtained, as well as what the scope of such cover should be.

Vicarious liability of client

The client is not, as a general rule, vicariously liable for the delictual actions of its contractors in terms
of a contract of letting and hiring of work, as is the case with a normal employer in an employment
contract, who is liable for the actions of his/her employees. Two exceptions to this general rule exist,
however:

(a) where the client requests the contractor to complete dangerous work that could reasonably cause
loss or damage to third parties, and where no proper preventative measures are taken; and
(b) where a continuous legal duty rests on the client to prevent loss or damage, and the client does not
comply with this duty.
Different Types of Contracts
Basic classification of contracts for letting and hiring of work
Lump sum or fixed price contracts (FP contracts) or design and build
The parties agree on a fixed price for the specific piece of work. This type of contract is described by
the courts as a contract for the completion of a determined piece of work for a determined price. The
contract can be concluded with or without a schedule of rates (for purposes of amendments).

Admeasurement contracts
In this case the performances due are merely determinable and become determined only once the piece
of work has been completed. The work is inspected on completion and remuneration is determined
accordingly. Two broad categories can be distinguished, namely:

(a) Bill or schedule of quantities contracts. The total contract price is the price for which the contractor
tendered, based on the work as set out in the bill or schedule of quantities. It is thus for a fixed price
of unfixed quantities. The work can be divided into separate units or milestones with reasonable
precision. The contractor is compensated on completion of a specific pre-determined unit or
milestone.
(b) Contracts at schedule rates. The work is also divided into units or milestones. The contractor is
compensated for each unit or milestone completed as set out in the predetermined schedule of rates.
The total final price due is not determined before the entire piece of work has been completed, as it
is not clear at the beginning of the project how many units have to be completed, or how many can
actually be completed during the project.

Cost contracts
Three types of contracts can be distinguished, namely:

(a) Cost reimbursable contracts or time and materials contracts (TM). In this case, the description of
the piece of work is so vague that it forces the parties to agree that the contractor is reimbursed for
all actual costs (labour and other external costs, such as, material used) on completion of the work.
(b) Cost-plus contracts. The actual costs incurred by the contractor, together with a percentage thereof
or a fixed amount claimed as profit, are payable to the contractor. One can distinguish between:
(i) cost plus fixed fee contracts (CPFF); and
(ii) cost plus incentive fee contracts (CPIF).
(c) Target contracts. In addition to the reimbursement of actual costs incurred by the contractor, the
client also offers to pay the contractor certain bonuses or incentive fees where the contractor
reaches certain predetermined performance milestones before or on a certain date. The target
referred to can be either the time within which performance is delivered, or the quality thereof.
International and national pro forma contracts
During the last decade two important international sets of pro forma contracts have been developed that
are used by engineers, builders, architects, manufacturers, and developers, amongst others, with great
success. One can refer briefly to the following:

NEC contracts
The Institute of Civil Engineers (ICE) has provided their members with a standard set of contracts since
1993 for use in practice. The latest editions of the family of pro forma documents were published in
2017 and are referred to in industry as the NEC4. These documents are periodically updated to reflect
international trends and development.

Documents and user guidance notes that are, for example, available include:

(a) a main construction and engineering contract;

(b) a construction and engineering subcontract;
(c) a professional services contract;
(d) an adjudication contract;
(e) a term service contract;
(f) a framework contract;
(g) a professional services short contract;
(h) a standard form for appointing project managers; and
(i) a short version of the construction and engineering contract.

These contracts are endorsed as suitable model contracts and documents by governments and industries
worldwide. The language and grammar are simple and the sentences are deliberately kept short. These
contracts comply with the general approach to use normal, plain and understandable language for
contracts [see also the Consumer Protection Act section 22].

These contracts are endorsed as suitable model contracts and documents by governments and industries
worldwide. The language and grammar are simple and the sentences are deliberately kept short. These
contracts comply with the general approach to use normal, plain and understandable language for
contracts [see also the Consumer Protection Act section 22].

The documents contain proposed clauses and guidance notes on how one is to assemble and draft such
a contract or document. The latter usually contains flow charts that indicate exactly how the contract
should be structured, according to the user’s choice of basic clauses. One first determines which core
clauses are to be included in a specific contract. Thereafter, the main option clauses are determined and
then the secondary option clauses. Finally, documents and attachments or annexures can be added as
required from an additional list supplied.
Care must be taken to adapt the contract to comply with the legal principles of the country whose laws
apply to the contract. The contract has to comply with statutory and common-law principles of the
country that has jurisdiction over the contract.

JBCC
The Joint Building Contracts Committee (also known as the JBCC) prepares a set of pro forma contract
documents to be used in the construction environment. These contracts and documents have been
approved by the Construction Industry Development Board (CIDB) and are used by national and
provincial governments and in other, such as SADC, countries. The documents are compiled in the
interest of standardisation, good practice and the equitable distribution of contractual risk in the building
industry. The documents also include State provisions. An extensive revision of the Principal Building
Agreement was launched and published in 2018. The suite of documents is periodically updated. They
are recommended by the Association of Construction Project Managers; Association of South African
Quantity Surveyors; Building Industries Federation of South Africa (BIFSA); The South African
Institute of Architects; South African Property Owner’s Association, and Specialist Engineering
Contractors Committee.

The set consists of various pro forma contracts, for example:

(a) the principal building agreement;

(b) the nominated/selected subcontract agreement;
(c) the minor works agreement; and
(d) their respective contract data and other documents, such as, pro forma payment and construction
guarantees, payment certificates and certificates of completion, that can be used for various
projects.

FIDIC
The International Federation of Consulting Engineers (Federation Internationale des Ingeniers
Conceils) publishes international standard forms of contracts and related materials for works, for use
by clients, consultants, subconsultants, joint ventures and representatives in the construction and
engineering sectors. It has become tradition that FIDIC contracts are known in reference to the colour
of their covers.

These are of the oldest suites of model contracts and documents in the construction industry and are
updated on a regular basis. The latest updates to the FIDIC suite of contracts was in 2017 and include:

(a) Conditions of Contract for Construction (Red Book);

(b) Conditions of Contract for Plant and Design-Build (Yellow Book); and
(c) Conditions of Contract for EPC/Turnkey Projects (Silver Book).
Previous editions refer to other colours. The wide range of documents also includes related materials
such as standard pre-qualification forms, business practice documents such as policy statements,
position papers, guidelines, and training manuals. The suitability of a specific form of contract depends,
for example, on the value of the project, construction time, whether it involves simple or repetitive
work, whether it is a larger or more complex projects, whether the contractor is going to do most of the
design and the like. The suitability of a specific form of contract depends, for example, on the value of
the project, construction time, whether it involves simple or repetitive work, whether it is a larger or
more complex projects, whether the contractor is going to do most of the design and the like.

GCC and other contracts

The General Conditions of Contract for Electrical and Mechanical Engineering prepared by the South
African Society for Consulting Engineers, and the General Conditions of Construction Work for
Government Procurement (prepared by the South African Institute for Civil Engineers (SAICE) [both
known as the GCC, which can cause some confusion] have been used for many years as pro forma
documents for the broad construction sector and are endorsed inter alia by National Treasury and the
Department of Public Works and preferred as contract model of choice in suitable government projects.
They are also endorsed by various other organisations, such as the National Building Research Institute
of the CSIR and the Society for Municipal Electricity Institutions. The conditions contain a wide variety
and broad spectrum of clauses that may be selected according to the specific needs of the parties
involved in a project. The GCC was extensively revised in 2010 and is updated and augmented on a
regular basis. The SAICE Short Form of Contract was released in 2018. It should be noted that the GCC
is focused mainly on local (national) use and does not, as is the case with the NEC and FIDIC, enjoy a
wide-spread following and application for international projects.

Various other standard contracts are available in practice. It depends on the people involved in the
project and the circumstances of each project which standard form of contract, either NEC or JBCC or
any other form, is to be used as a basis for a specific contract. One has to take care, however, not to
merely copy clauses without taking into account the facts and circumstances of each case, and the
resulting effect of each clause.

Termination of Contracts
The usual ways of terminating contracts in general also apply [see 4.107 – 4.159].

Specific methods of termination

Some methods of termination are especially relevant for the termination of contracts of letting and
hiring of work:

(a) Notice
The parties must reach an express agreement regarding when the contract may be terminated by the
unilateral notice given by one of the parties to the contract.

(b) Agreement

Where one party waives his/her contractual rights it has to be accepted or approved by the other party
before the legal obligation will come to an end.

(c) Resolutive term

This method of termination is not always recommended as a contract can be terminated at an agreed
date, irrespective of proper performance by the parties. The Consumer Protection Act contains
extensive provisions in this regard relating to the termination of fixed term consumer agreements
[section 14] A “fixed term agreement” is not defined in the Act. This right excludes transactions
between juristic persons irrespective of their juristic threshold. These agreements may not exceed
prescribed maximum periods, which are at the moment 24 months, unless a longer period is agreed on
expressly and provides a demonstrable financial benefit for the consumer. The consumer may cancel
on expiry of the fixed term without payment of a penalty or costs, or at any other time by giving 20
business days notice in writing or another recorded manner and form. The supplier may in this instance
impose a reasonable cancellation penalty in accordance with the factors listed in section 14(2). In terms
of the Act, a supplier must give the consumer notice in writing or in a recordable form, of the impending
expiry date of their agreement and the possibility of renewal or extension. This notice must be given
not less than 40 but not more than 80 days before date of termination. Where the consumer fails to
instruct the supplier to terminate the agreement on its expiry date, or fails to inform him/her that he/she
agrees to the renewal, the transaction is deemed to continue on month-to-month basis.

(d) Compromise

Where the parties intend to terminate the total agreement between them and to substitute this agreement
with a compromise, care must be taken to ensure that the compromise is complete and that it contains
all aspects that are to apply between the parties in future. A compromise must not contain only those
aspects that are disputed by the parties, but must also refer to the other clauses that will survive the
termination of the original agreement through the compromise.

(e) Prescription

The general prescription principles and terms [see 4.147] also apply to these contracts. A claim in terms
of a contract of letting and hiring of work prescribes three years from date of claim or on the date on
which the plaintiff becomes aware of a possible claim.
(f) Insolvency or liquidation

If any party to a contract of letting and hiring of work is declared insolvent (in the case of a natural
person), or liquidated (in the case of a juristic or legal person), the trustee of the insolvent estate has
the right to decide within a reasonable time whether the contract is to be maintained or terminated. If
he/she chooses the latter, the other party has a claim against the insolvent estate (usually a concurrent
claim). It is possible to agree that the contract is terminated immediately on insolvency or liquidation.
Practice question
Mr Gilmore is the contracts manager at FBS Construction Limited. FBS has been awarded a contract by Riley
Properties to construct a residential house in Pretoria. The contract stipulates that the contractor (FBS) is to supply
bricks, cement and roofing sheets for the building. Mr Gilmore is preparing briefing notes for FBS’ board of
directors. His predicament is that he does not know how to classify the contract with Riley properties, that is,
whether it is a contract of sale or one for the letting and hiring of work. Explain the legal principles that would
apply in order to determine the type of contract. Your answer must also include a basic discussion of the
essentialia of the contract of letting and hiring of work.

Textbook:

Definition of a contract of purchase and sale:

The contract of sale is a specific, nominated, reciprocal agreement to buy and sell, in terms of which
the seller has the true intention to deliver a determined or determinable thing together with all his/her
rights in the thing undisturbed to the buyer, and the buyer has the true intention of paying a determined
or determinable price for the thing.

Essentialia for a contract of purchase and sale:

These essentialia distinguish a contract of sale from all other contracts, and are:

(a) the intention of the seller to sell and the buyer to buy (that is to say, consensus on the nature of the contract);
(b) the thing sold (that is to say, consensus on what is bought and sold); and
(c) the purchase price (that is to say, consensus on the monetary performance owing by the buyer to the seller).

Definition of a contract for letting and hiring of work:

A contract for the completion of a piece of work is a reciprocal agreement between a client (the lessor
of the work) and a contractor (the lessee of the work), in terms of which the contractor undertakes to
deliver a finished product of work within an agreed time, in exchange for the payment of remuneration
by the client to the contractor. In accordance with the approach by McKenzie, the generic term
“construction contract” is used hereafter throughout this chapter and refers to and includes all the
contracts for the performance of specific services or completion of work.

Essentialia of a contract for letting and hiring of work:

For the parties to conclude a contract of letting and hiring of work, in other words a construction or
service delivery contract, they must reach consensus on the specific essentialia of that specific contract.
The following elements must be agreed on:
(a) The contractor will complete a specified piece of work or deliver a specified service; the corporeal thing to
or on which work is done or the service delivered, must belong to the client; or the client’s material must be
used in the construction thereof. The contractor may also, as the agent of the client, purchase materials on
 behalf of the client with which he/she has to complete the work. In this situation his/her account will reflect
the price of the parts purchased (for example spare parts to be used to repair a car) for which he/she must be
reimbursed, and the compensation due for the service that he/she provided by installing the material or using
it in delivering his/her services (where he/she repairs the car by replacing the old parts with new ones).
Should the contractor, however, use his/her own materials to manufacture an object for another and to supply
him/her with it, their contract may be purely a contract of purchase and sale. The intentions of the parties
will in each situation determine which contract they intend to conclude [see chapter 8 for the law of purchase
and sale]. Intellectual property rights in the work vests in the client on completion and acceptance of the
work, unless these rights are contractually reserved by the contractor. In such a case the client could obtain
only limited rights of, for example, use of the work. It is furthermore important to note the scope and
description of “services” in the Consumer Protection Act [68 of 2008 section 1] in order to determine whether
the Act applies to the contracts discussed in this chapter [see 40.14 – 40.18 for the application of the Act].
“Service” includes but is not limited to, in the context of construction contracts:
(i) any work or undertaking performed by one person for the direct or indirect benefit of another;
(i) the provision of education, information, advice or consultation, except advice that is subject to regulation by the
Short-term Insurance Act 53 of 1998, the Long-term Insurance Act 52 of 1998 and the Financial Advisory and
Intermediary Services Act 37 of 2002;
(ii) the transportation of persons or any goods;
(iii) the provision of accommodation or sustenance, any entertainment or similar intangible product or access thereto,
access to any electronic communication infrastructure, access or of a right to access to an event or to any
premises, activity or facility;
(iv) a right of occupancy of, or power or privilege over or in connection with, any land or other immovable property
other than in terms of a rental; and
(v) rights of a franchisee in terms of a franchise agreement, irrespective of whether the person promoting, offering
or providing the services participates in, supervises or engages directly or indirectly in the service. It appears
clearly that most parties involved in a project concerning the construction or engineering industries, as well as
project managers for such projects, may fall within the scope of the Act.
(b) The contractor completes the work independently from the client.
(c) The work is completed within an agreed or reasonable time.
(d) Remuneration is payable by the client as counter-performance.

Answer:

The first critical aspect of the essentialia of the contract is the intentions of both parties (FBS
Construction Limited and Riley Properties). The intentions of the parties are not clear from the given
information, which means that this could be a contract of purchase and sale (if FBS Construction
Limited has the intention to sell the residential house to Riley Properties as the buyer).
THEME 6: ALTERNATIVE DISPUTE RESOLUTION

Important: A general complaint about the current justice system in South Africa is that the cost of
litigation is prohibitive. Though section 34 of the Constitution provides everyone with the right to have
a dispute heard before a court, the equality so achieved is more of a façade than a reality; as people are
still excluded by their economic, social or cultural abilities to make use of those rights or to participate
meaningfully in the administration of justice. During the last few years many governmental and non-
governmental organizations have been striving at various levels to provide affordable and appropriate
dispute resolution institutions and procedures in different communities of society to: promote effective
access to justice for all the people of South Africa; relieve court congestion; prevent unnecessary costs
and delays and involve parties in the dispute resolution process.

SU 1: Alternative dispute resolution

Learning material

Business Law chapter 17

Learning objectives

At the conclusion of this study unit, you should be able to demonstrate your knowledge and
understanding of alternative dispute resolution through your ability to:

1. Define, and differentiate between, mediation and arbitration;

2. Discuss the advantages and disadvantages, and differentiate between the advantages and
disadvantages of, mediation and arbitration;
3. Discuss the circumstances appropriate for mediation;
4. Discuss the agreement to mediate;
5. Describe the different forms of mediation;
6. Explain the material characteristics of arbitration;
7. Discuss the arbitration agreement with specific reference to the validity and the consequences of
an arbitration agreement;
8. Name matters which are not susceptible to arbitration;
9. Discuss the role and the qualifications of arbitrators and umpires;
10. Explain the legislative provisions applicable to the arbitration procedure;
11. List the formal and substantive requirements for a valid award;
12. Explain, and differentiate between, the rectification of mistakes, the altering of awards, the setting
aside of rewards and the remittal of awards;
13. Explain the appeal and review of an arbitration award;
14. Explain, and differentiate between, certification, valuation and arbitration;
15. Discuss private adjudication;
16. Apply the abovementioned principles/law to relevant but unfamiliar scenarios to solve practical
problems.
Note: You must be able to briefly discuss whether or not alternative dispute resolution could facilitate

the promotion of social justice.

Practice question

Halcon Ltd is a company in the construction business. In January 2020 the company entered into a contract with
Zenem Ltd whereby Halcon was to construct a shopping complex for the former. Clause 6 of the contract
provided as follows: “Any dispute arising from or in connection with this contract shall be referred to the
Arbitration Foundation of Southern Africa (AFSA) for resolution by an arbitrator appointed by AFSA in accordance
with the rules of the said Foundation.”

The contract also provided for five stage payments whereby Halcon was to be paid 20% of the contract price
upon completion of each agreed stage of the shopping complex project. Upon completion of the first stage of
the project Halcon submitted its invoices to Zenem for payment of 20% of the contract price for that stage.
Zenem’s response was that they were not going to pay anything since they had found another cheaper contractor
to undertake the project. In light of this apparent repudiation of the contract Halcon accepted Zenem’s
repudiation and cancelled the contract. Answer the following questions in relation to the facts given above.

1) What type of arbitration is envisaged by clause 6 above?

2) Based on the provisions of the Arbitration Act 42 of 1965 and case law, discuss the effect/consequences
of an arbitration agreement such as the one embodied in Clause 6 above.
3) Discuss whether the arbitration agreement embodied in clause 6 is still valid given that Halcon has
cancelled the construction contract due to Zenem’s repudiation. Provide comprehensive reasons for
your answer.
4) Assume that the arbitration agreement is still valid and that Halcon successfully obtained an arbitral
award against Zenem for the payment of 20% of the purchase price. Can Zenem appeal against this an
award?

Introduction
 Since legal disputes are inevitable, countries in the world have mechanisms to resolve legal
disputes.
 Courts are not the only forums to resolve disputes; as an alternative to courts, alternative dispute
resolution (‘ADR’) mechanisms provide speedy and effective forums to resolve disputes. (Courts
usually have backlogs and delays, they are expensive, and there are numerous technicalities and
formalities.)
 Parties can decide to resolve their disputes through private negotiation without the participation of
the third party.
 Parties can also reach consensus with the view of reaching a contractual agreement with regards
to their commercial dispute. This agreement would bring the matter to an end.
 Some legislation that are applicable to some industries provide for ombudsman who will resolve
disputes between disputants e.g Tax ombudsman.
 When negotiations have failed between the parties, they can agree or reach consensus orally or in
writing to resolve their dispute with ADR (Private mediation and arbitration).
 There are national and international institutions that promote mediation and arbitration e.g.
Association of Arbitrators (Southern Africa) and International Court of Arbitration in Paris.
 South Africa has accepted the Convention on recognition and enforcement of foreign arbitral
awards. This means that a foreign arbitral ward can be recognised and enforced as an order of court
in South Africa.
 Private mediation and arbitration can be used in a number of disputes such as building contracts
disputes or labour disputes.
 The standard forms of contracts provide ADR mechanisms to resolve disputes.
 Oral mediation and arbitration agreements are regulated by common law and written arbitration
agreements are regulated by Arbitration Act (Herein after referred to ‘AA’) 42 of 1965.
 Parties in arbitration agree to resolve their disputes outside court.
 However, the AA provides that the courts can enforce the arbitration award and set aside the
award in review.
 The AA does not do away with common law principles.
 This means that arbitration which is invalid in terms of the AA is valid in terms of common law
principles and enforceable by Courts.

Private mediation
◆ General rule: Mediation will be successful if it suits the objectives and the needs of the disputants.
◆ Mediation is appropriate if one or more of the indicators are present in a dispute:
 Desire from the parties to reach a friendly or polite (amicable) and negotiated settlement.
 The parties desire to continue with their relationship after dispute.
 There is absence of clear legal rules regulating the area of dispute between the parties. (grey
area in law)
 The dispute in not of a serious nature and parties are in equal bargaining position.

Definition of Private mediation

 This is a voluntary process where an impartial third party intervenes in a dispute to attempt to
convince the parties to come to an agreed solution.
 This third party cannot impose a solution if the parties cannot come to an agreement about the
dispute.
 E.g. A and B request C to mediate in their dispute with the aim of convincing them to reach an
agreed solution.
 Note that mediation and conciliation refer to the same process. In this theme we will refer to it as
mediation.

Agreement to mediate
Parties must agree to subject their dispute to mediation. E.g. This means that if Anna offers to subject
her dispute with Peter to mediation, Peter must accept the offer to subject the dispute with Anna to
mediation. This contractual principle is extremely important as mediation is voluntary.

Advantages and disadvantages of mediation

(please study the advantages and disadvantages on your own as they are easy to comprehend and note
that you may be tested or examined on them). They are found on paragraph 17:11 (a)-(f) and 17:12 (a)
- (d).

Key terms used in advantages and disadvantages

➢ Informal: without cumbersome formal court processes

➢ Cross examination: a type or form of questioning that evaluates the truth of the statements.

Textbook:

Advantages
When comparing mediation to arbitration or court procedures, one finds a substantial number of
advantages associated with mediation. The main advantages are that it:

(a) is more informal;

(b) can be less expensive in certain instances;
(c) is a speedier process;
(d) is always preferable for a dispute to be settled by mutual agreement, to having an independent third party
(which may include an arbitrator or the presiding officer of a court) make a decision that results in there
being a winner and a loser to the dispute;
(e) is confidential in nature and it takes place without prejudicing existing rights; and
(f) does not result in a final decision and, therefore, other options such as ongoing mediation, arbitration or even
litigation may still be considered.

Disadvantages
When comparing mediation to arbitration and litigation, mediation may have certain disadvantages. The
main disadvantages are that:

(a) the process is dependent on a measure of co-operation between the parties;

(b) some disputes may have passed the point of consensus-finding processes and perseverance with mediation
would, therefore, only amount to a waste of time and costs;
(c) a party to a dispute may possibly agree to the suggestions made by a mediator while all the relevant facts to
the dispute have not yet been disclosed or been subjected to cross-examination; and
(d) a perception may be created that the party who proposes mediation is revealing a lack of confidence in his/her
own case.

Forms of mediation
❖ There is no legislation that regulates mediation, parties may decide on the process.
❖ They can also decide that Chapter 2 of the Court Annexed Mediation Rules which form part of the
Magistrates’ Court rules regulate their mediation. Mediation may take one of the following forms:
- After the finalisation of mediation process, the mediator recommends the solution.
- The issues in the dispute are identified and parties are assisted to find the solution without the
mediator providing his opinion.
- Mediation comes before arbitration and if mediation fails, the mediator or another person will
act as the arbitrator.
- Arbitration comes before mediation; the arbitration award will be sealed in an envelope and
revealed only if mediation fails.

Private arbitration
 This is an ancient mode of dispute resolution and it can be traced back to Roman and Roman-Dutch
law.
 Arbitrations based on written agreements are regulated Arbitrations Act 42 of 1965 and arbitrations
based on oral agreement are regulated by common law.
 Section 34 of the Constitution of South Africa, 1996 provides that everyone has the right to have
the dispute that can be resolved by application of law to be resolved in a fair public hearing before
a court or another impartial and independent forum or tribunal.
 The Constitutional court in the Lufuno case held that arbitration does not form part of the fair
public hearing before the court or impartial forum as provided in section 34 of the Constitution.
(arbitration does not meet the requirements of section 34)
 When a party elects to use arbitration does waive their constitutional right but choose not to rely
on it.
 The fact that parties elect to use arbitration does not mean that fairness falls away in the process.
 Fairness remains an important common law requirement. This means that all arbitrators must act
with fairness.

Definition of private arbitration

 Private arbitration is a process where disputants agree that the elected impartial person can make
a final award with regard to agreed issues after a judicial inquiry outside the court process or other
statutory dispute resolution mechanism.
 Parties cannot refer the matter that is within the scope of an arbitration agreement to a court or any
statutory dispute resolution forum.
 However, courts come in to enforce the arbitration awards.

Characteristics of arbitration from the definition

▪ Arbitration is in terms of an enforceable contract (parties must agree).
▪ Dispute is resolved by a final award.
▪ Arbitration is adjudicated by an impartial (neutral or unbiased) person who has no connection with
courts.
▪ Parties accept to be bound by the award.

Advantages and disadvantages of private arbitration

(please study these on your own as they are easy to comprehend and they are found on paragraph 17:19
and 17:20.) Please note that you may be tested and examined on them.

Textbook:

Advantages
When comparing private arbitration to court and compulsory arbitration procedures, a number of
advantages associated with arbitration become evident. The main advantages are the following:

(a) The parties to a dispute may appoint as an arbitrator a specialist in relation to the dispute at hand.
Generally, the officers presiding in the courts are legal experts, but they are not necessarily
specialists in fields such as engineering and computer technology.
(b) Private arbitration may be an expedient way of finalising a dispute. There is, for example, no court
roll whereby parties have to await their cases.
(c) Arbitration is private and confidential. This process does not take place in a public court and in the
presence of the public and the media.
(d) The parties to the dispute may adapt the procedure to be followed as well as the remedies that may
be awarded through consensus. Court procedures, on the other hand, are regulated by sets of rules
and only recognised remedies may be awarded.
(e) An arbitration award is final and is not subject to appeal unless the parties reach such an agreement.
Under the general court structure an appeal lies from the Magistrates’ Court, to the High Court, to
the Supreme Court of Appeal, and in some instances even further to the Constitutional Court.
(f) Arbitration procedures are mostly more informal and less intimidating than court proceedings.
(g) Arbitration may in certain instances be a less expensive means of finalising a dispute than court
procedures. It must be kept in mind, however, that the parties themselves are responsible for the
arbitrator’s professional fee. The State is responsible for the salaries of magistrates and judges.
Disadvantages
Private arbitration is not without some disadvantages. The most important disadvantages are that:

(a) a person who is dissatisfied with an arbitration award does not have the option to appeal against
the award;
(b) it may possibly be more expensive than litigation [see 17.19(g)];
(c) certain disputes are more suited to litigation where, for example, a court decision is necessary for
setting a precedent;
(d) the parties to a dispute may possibly qualify for legal aid by the State if they litigate, while there
is no possibility of legal aid in the case of arbitration of a dispute; and
(e) in instances where more than two parties are involved in a dispute, disputants who are not parties
to the arbitration agreement may not be joined in the arbitration proceedings without their consent,
as is the case in proceedings before the courts.

Arbitration agreement
 Parties may include an arbitration clause in their contract e.g. building contract. The clause would
provide that any dispute in the contract will be subjected to arbitration.
 In some instances parties can conclude a separate arbitration contract.
 These agreements should comply with all contractual requirements to be valid.

Matters not suitable for arbitration

Section 2 of the Arbitration Act 42 of 1965 (‘AA’) prohibits these matters for arbitration:
 Matrimonial and related matters. (e.g. Divorce, custody of children)
 Legal status of a person (e.g. Mental capacity and insolvency)
 Criminal matters are also prohibited but this is not mentioned in the ‘AA’

Validity of arbitration agreement

Let’s explain this with an example.

E.g Anna concludes a building contract with Peter for Peter to build a house for Anna. The parties
include a clause that any dispute that arise in the contract will be subjected to arbitration.

 Since arbitration clauses are included in the main contract, the question is what happens when the
main contract is cancelled, terminated due to breach (repudiation) or the main agreement is void
ab initio.
 Arbitration clauses stand on their own as independent of the main contracts. (They are additional
(ancillary) to the main contract)
 However, if the main contract or agreement that includes arbitration clause in case of a dispute is
void ab initio or parties agree (without any breach) to terminate the arbitration contract, the
arbitration contract will also be void or terminated.
 Suppose Anna repudiates (indicates that he will not perform (repudiation)) and Peter cancels the
contract. The Arbitration clause as an independent clause will remain intact (applicable) to resolve
disputes that arose from a cancelled contract.
 Suppose Anna repudiates and Peter accepts repudiation. This means that the contract will be
terminated. The arbitration clause is nonetheless applicable to resolve the dispute between Anna
and Peter.
 The two assertions above in bold provide the severability of arbitration clauses. Severability means
that even though the main contract is terminated or cancelled, arbitration clauses nonetheless
remain intact or applicable to resolve the disputes in contracts. You must be able to distinguish
bullet 3 and the two bullets in bold.
 The primary purpose of arbitration is to resolve disputes.

The effect of the arbitration agreement

 Arbitration agreements are meant to prevent disputes form being resolved in courts.
 The primary aim of arbitration clauses or agreements is to provide speedy and efficient alternative
dispute resolution mechanisms.
 When parties agree to settle disputes with arbitration they are in essence abandoning their right to
litigate or refer their matter to court.
 However, compliance with the latter will lead to problems when concluding contracts with organs
of state where constitutional rights such as right to information and right to just administrative
justice are concerned.
 Where there is an agreement that all disputes should be referred to arbitration, justice may be
miscarried in instances where Promotion of Administrative Justice Act and review in terms of
legality are concerned.
 Section 3 of the AA provides a solution to the above issue by providing that:
- Unless arbitration agreement provides otherwise, arbitration agreement can be terminated by
consent of two parties.
- A party may on good cause shown apply to court for the matter not to be referred to arbitration.
(In other words avoid arbitration where it will result in unfairness to one of the parties)
 Section 6 of the AA provides that when a party takes to court a matter that is agreed to be subject
to arbitration, the opposing party can apply for the stay of proceedings (stop proceedings).
 The responsibility to show why the proceedings should not be stayed rests with the opposing party
and the opposing party must show sufficient cause (reasonable cause) why the matter should not
be taken to arbitration. (In other words avoid arbitration and instead take the matter to court)
 Let’s make an example of how section 3 and 6 are applicable.
- E.g. A concludes contract with one of the state Departments and the parties also insert a clause
that any dispute in the contract will be subjected to arbitration. A dispute arises and A realises
that arbitration will be unfair and infringe one of his constitutional rights.
 In this case both parties must agree to terminate arbitration agreement.
 A may on good cause shown (unfair and infringement of constitutional right) apply to court
for the matter to be heard in court instead of arbitration.
 The state Department will apply for a stay of proceedings (stop the proceeding and invoke
or rely on arbitration agreement)
 A will have to show sufficient cause (unfair and infringement of constitutional right) why
the matter should heard in court. In other words he opposes the stay of proceedings.
 In some instances it may be necessary to avoid arbitration and take matters to court.

Arbitrator or umpire
• An arbitrator must be impartially (objectively) and wisely (judicially) resolve disputes.
• The arbitrator’s position is similar to that of a judge.
• And parties when choosing the arbitrator their decisions should not be influenced (unfettered) by
any one.
• The latter sometimes makes arbitration more attractive than the courts.
• In building contracts, parties can agree that an architect who is involved in the project will resolve
disputes. However, an architect may be required to take a decision concerning matters that involve
his duties/or involvement in the project. Caution should be taken to guard against circumstances
where one decides his own case.
• Thus, parties can agree that an architect who will be elected in case of dispute will resolve the
disputes. (An independent architect or engineer)
• Architects or engineers are better suited than legal professionals to resolve disputes that may arise
in technical contracts such as building contracts because they have industry specific skills and
experience.

Qualifications of arbitrators
→ The AA does not prescribe qualifications.
→ However, it imperative to appoint a person who has expertise and experience in the area of dispute.
This will ensure efficient resolution of disputes.

Number of arbitrators
▪ A matter can be handled by one arbitrator.
▪ In some instances by two or more arbitrators.
▪ If there are three arbitrators in a tribunal, a majority decision is taken. E.g 2 in favour of Anna and
1 in favour of Betty.
▪ E.g If two or four arbitrators are appointed and cannot reach a majority decision, then an umpire
can be appointed to make an overriding decision. (In case of a tie or deadlock)
▪ The distinction between an umpire and the third arbitrator is that the latter takes part in the
proceedings like other arbitrators and has the same vote like other arbitrators and the umpire comes
in when the arbitrators fail to reach a majority decision and makes an overriding award.

Arbitration procedure
 The arbitration process is informal, no formal court proceedings and rules.
 The Act has the following rules to control arbitration
- Any party may request the witness to be called to give evidence or or produce documents
- Unless the agreement provides otherwise, parties or witnesses may be required to give evidence
under oath or produce documents as evidence to narrow the issues. (discovery: providing
documents relevant to a dispute so that all parties are aware of the issues that are in dispute)
- Unless arbitration agreement provides otherwise, a party may be ordered to allow inspection of
property to the other party of the dispute to be better informed about the issues in dispute.
- The arbitrator musk keep the record of evidence and must determine how recording should be
done.
 Arbitrations are confidential and free from the public knowledge.

Award
➢ The arbitrator’s award must be delivered after considering all the evidence from both sides and
must comply with all formal requirements (procedural) and also all substantive requirements
(comply with the law).
➢ Formal (procedural) requirements of the ward (please study them on your own on paragraph 17:37
and note that you may be tested and examined)
➢ No reasons are required by the Act or common law to justify the award.
➢ Substantive requirements (in accordance with the law) Study this on your own on paragraph 17:
38) You may be tested and examined on them.
➢ An arbitrator unless the agreement provides other can order damages and specific performance.
➢ The arbitrator cannot enforce the order by himself or herself.
➢ Once it is made an order of court, the normal rules of enforcement come in.
➢ Usually there is no need for making the arbitration ward an order of court since parties voluntarily
abide by it.
Rectifying of mistakes
o The arbitrator may correct omissions (clerical mistakes) in the award. E.g. mistakenly writing R35
000 as award instead of R 36000.
o The latter is an exception to the doctrine of functus officio which means that once the arbitrator
has given an award he/she cannot re-examine it or alter it.

Appeal and Review

➔ Arbitration awards are not subject to appeal unless the arbitration agreement provides otherwise.
➔ A party who is not satisfied with the award may take it on review.
➔ Section 33 of the AA provides limited grounds on which the award can be taken on review.
➔ The limited grounds are:
- When arbitrator has taken bribes or is impartial
- Irregularity for example failure to hear evidence from both sides (failure to apply natural justice, which
is essentially right to a fair hearing)
- Exceeding bounds of the arbitrator’s authority.
- Award obtained in an improper manner.
➔ There is a distinction between the statutory limited grounds of review and wider grounds of review
of statutory arbitration.
➔ In the Shoprite case the court held that arbitration awards of the Commission for Conciliation,
Mediation and Arbitration should be rational or reasonable (sensible) in terms of section 33 of the
Constitution in order to be in line with administrative justice. This is a wider ground.
➔ However, in the Stocks case it was held that private arbitration award should only be subjected to
limited number of statutory grounds of review only.
➔ In ACTWUSU cases it was held that arbitration is not administrative justice in terms of section 33
of the Constitution.
➔ The application for setting of the award should be made within 6 weeks of publication of award or
discovery of corruption.

Remittal
 Remittal is referring back a matter to a forum for reconsideration.
 Grounds of remittal of arbitration awards to the arbitrator:
 The parties or the court may refer the matter back to the arbitrator on good cause shown
(reasonable).
 Examples of factors that have led to remittal in the past.
- Vague and unclear award.
- New evidence emerges
- Mistake by arbitrator
- Lack of finality in the matter.
 In Leadtrain case it was held that once the matter is decided, remittal is not easily available and
this applies to costs of orders made by the arbitrator.

Valuation, Certification and Private adjudication

These are dispute resolution processes that are similar to arbitration. The Arbitration Act is not
applicable to these processes.

Valuation
o In circumstances where parties in contract cannot reach an agreement about the value of an item
to be sold or the value of rent payable for the premises to be leased, a valuator can be appointed.
o The valuator must act reasonably and can be held liable for negligence.
o The valuator is an expert who should examine the item and give it a value.
o She does not look at evidence.
o The valuator’s decision cannot be reviewed by courts.

Certification
 Certification is when the agent (architect or engineering) of the client in a building contract
examines the work and progress of the contractor to determine the payment of the contractor.
 The court will enforce the certification only if the agent did not exceed his authority or mandate
and there is no conspiracy between the agent and the client.

Private adjudication
 This is a dispute resolution process used in construction contracts to resolve disputes in order to
ensure speedy payments in contracts and finalisation of matters.
 No statute or common law principle is applicable.
 The rules are provided by Construction Industry Development Board.
 Adjudicator’s decision unlike arbitration award is enforceable until reconsidered by court or
arbitrator.
 The parties must abide by the decision of the adjudicator even though they are not satisfied with
it.
 Adjudicator’s decision is subject to less procedural standards.
 The adjudicator has liberty to question parties separately and decide the matter without hearing
oral evidence.
 It is the task of the adjudicator to speedily and cost effectively resolve disputes.
 The adjudicator operates under strict time limits to ensure cash flow in building contracts.
PRACTICE QUESTIONS FOR SEMESTER TEST 2

Question 1 [6 marks]
Ann comes to you for advice. She tells you in sketchy detail that she had entered into a contract with
Mary whereby the latter was supposed to deliver something to her. Ann says Mary has not yet made
delivery, consequently she (Ann) is considering cancelling the contract because of Mary’s delay in
making delivery. Ann informs you that their contract does not contain a cancellation clause.

Advise Ann in general of the circumstances in which a party may cancel a contract due to delay by the
debtor (mora debitoris). In your answer also discuss the requirements that must be met in order to
cancel.

Answer (Memo)
Issue

Here the issue is the cancellation of contract due to mora debitoris in the absence of cancellation clause (lex
commissoria).

Rule

In the absence of a cancellation clause (lex commissoria) the creditor would be entitled to cancel the contract in
the face of delay by the debtor (mora debitoris) under two instances namely

(a) Where time is of the essence (1) and

(b) He/she acquires the right to cancel the contract (1)

With regard to (a) above that is cancellation where time is of the essence, this would be possible where:

- The debtor is in mora ex re, that is where the contract set a date for performance and the debtor is guilty of
delay (1) and
- Time is of the essence in the sense that it is critical for the debtor to perform at the agreed time, for example
where the contract is in respect of perishable goods that have to be resold within a specific time period before
they spoil (1)

Where time is not of essence the creditor may acquire the right of rescission by delivering a notice of rescission
to the debtor (1)

If debtor is already in mora ex re the creditor must demand performance within a reasonable time and notify the
debtor that he/she intends to cancel the contract if the debtor does not perform within the given time (1)

If contract does not specify date for performance the creditor must first place the debtor in mora ex persona by
means of a notice of demand (interpellatio) (1).

This should then be followed by a notice of rescission as explained above in order to gain right to cancel or, the
notice of demand may also be coupled with a notice of rescission (1)
Question 2
On 1 April 2018 Mr Smith entered into a contract of sale with Mr Gumede whereby he (Mr Smith)
bought ten (10) head of Jersey cows from Mr Gumede at a total price of R100 000 for the ten head. The
parties identified the ten cows from Mr Gumede’s herd and marked them with red paint for ease of
identification. In terms of the contract the cows were supposed to be delivered to Mr Smith’s farm on
10 April 2018. Unfortunately on 7 April 2018 there was a violent thunderstorm on Mr Gumede’s farm,
consequent to which the ten cows bought by Mr Smith were struck and killed by lightning.

(i) Discuss in general the seller’s duty of safekeeping and his liability for breach of this duty (5 marks);
(ii) Based on the facts given above discuss in full who bears the risk of the loss of the ten cows in this
instance (5 marks).

Answer (Memo)
(i) The seller has a duty to take care of and protect the thing sold from the time of conclusion of the contract
until the thing is delivered to the buyer (1).
The seller would be liable to the buyer for damages (1) if damage is caused to the thing sold as a result of
the negligent (1) or intentional act of the Seller (1).
Generally, the seller is not liable for any damages where his/her conduct was without fault (1).

[5]

(ii) The doctrine of the passing of risk (1) determines who bears the risk, between the buyer and the seller, where
damage is caused to the thing sold and neither party is at fault e.g damage is as a result of an act of God (1)
The general rule is that risk passes to the buyer as soon as the contract is perfecta (1).
A contract is perfecta when:
- The buyer and seller have the intention of buying and selling (1)
- The thing to be sold is determined (1)
- The purchase price is determined (1)
- And the contract is not subject to a suspensive condition or, if it was the condition has been fulfilled
(1)

In the present case the facts show that the buyer and seller intended to buy and sell ten head of cattle, the
cows were determined as the facts show that they were identified by red paint marking, the purchase price
was determined at R100 000 total for the whole herd. From the facts there is no indication that the contract
was subject to any suspensive condition.

Therefore the risk of loss of the ten cows passed to the buyer (Mr Smith) at the time of conclusion of the
contract (1 April 2018) as the contract was perfecta on that date (1 mark for application and 1 mark for
correct conclusion).

[5]
Question 3
Timo concludes a contract of agency with Sam for Sam to market and sell Timo’s sanitizer. Sam
concludes contracts of sale with five clients who own supermarkets on behalf of Timo. Timo decides
to terminate the contract of agency between him and Sam due to Sam’s dishonesty and fails to inform
the five clients. Sam continues to conclude another set of contracts with the five clients despite the fact
that the contract of agency has been terminated. Timo refuses to honour the contracts because the
contract of agency between him and Sam has been terminated. Is Timo bound by the contract? [5]

Using the same method of answering questions, please attempt this question on your own. Please be
comprehensive to obtain maximum marks. Do not assume that the reader knows the information;
provide the information as if the reader of your answer does not know the information.

Answer:

The act of agency refers to the juristic act that the agent performs on behalf of the principal, such as the
conclusion of a contract. In this case, a contract of agency existed between the agent (Sam) and the
principal (Timo), wherein the juristic acts Sam were to carry out on behalf of Timo, included the selling
of Timo’s sanitizer. The legal consequences of an act of agency are attributed to the principal and not
the agent, provided that the agent was properly authorised to perform the relevant act and did so within
the confines of the authority granted to him. In this case, the legal consequences of Sam’s acts of agency
will be transferred to Timo, if Sam conducted the acts of agency while being properly authorised to
perform those acts.

Under the doctrine of estoppel, wherein the person who acts as an agent does not have the actual or true
authority to act (neither express, tacit or implied authority), nevertheless has ostensible authority.
Ostensible authority is based on the theory, in simple terms, that the principal created an impression
that the agent has the authority to act in a certain way, even though he/she does not have such authority.

The requirements for ostensible authority are as follows:

Under the doctrine of estoppel, a principal will be held liable to a third party if the following
requirements are met:

(a) The principal must have created, either intentionally or negligently, a representation (impression).
(b) The representation must have been of such a nature that one can reasonable expect it to have
mislead the third party.
(c) The third party must have acted on the strength of the representation.
(d) The third party must have experienced prejudice as a result of acting on the representation.
Since Timo neglected to inform the five clients that Sam is not longer acting as his agent, he created
the impression that Sam is authorised to perform acts of agency on Timo’s behalf, as he had already
acted as an agent with these clients in the past. All four of the requirements set out above are met, which
means that at the time of the conclusion of the second set of contracts, Sam was acting under ostensible
authority. The legal consequences of Sam’s acts of agency under ostensible authority is therefore
transferred to Timo (the principal).

Timo is bound by the contracts.

Question 4
Mr Gilmore is the contracts manager at FBS Construction Limited. FBS has been awarded a contract
by Riley Properties to construct a residential house in Pretoria. The contract stipulates that the contractor
(FBS) is to supply bricks, cement and roofing sheets for the building. Mr Gilmore is preparing briefing
notes for FBS’ board of directors. His predicament is that he does not know how to classify the contract
with Riley properties, that is, whether it is a contract of sale or one for the letting and hiring of work.
Explain briefly to Mr Gilmore the essentialia of a contract of letting and hiring of work. [5]

Please answer this question on your own. Like Question 1, it requires the issue and the rule. Remember
the trick is to be comprehensive to obtain maximum marks.

Answer:

The answer is found under Theme 5: SU3 – Practice Question.

THEME 7: LABOUR LAW

Important: In the past, labour legislation in South Africa was based on racial categorisation and
discrimination with trade unions reflecting the racial divide. With the democratisation of the South
African government, transformation extended beyond the political arena to the labour market where
legislation such as the Labour Relations Act 66 of 1995 (LRA), Basic Conditions of Employment Act
75 of 1997 and Employment Equity Act 55 of 1998 were enacted to advance economic development
and afford protection to previously marginalised groups. Throughout this unit students must take
cognisance of the significant democratic transformation that has taken place in our country and identify
how enacted legislation aims to: Counteract the inequality of power between employers and employees;
protect employees against unfair discrimination and exploitation; and empower employees to partake
in collective bargaining practices to achieve social justice.

Please note that all the paragraphs that you should study on your own in this THEME are important and
you may be tested and examined on them.

SU 1: Introduction to labour law

Learning material

Business Law chapter 37

Learning objectives

At the conclusion of this study unit, you should be able to demonstrate your knowledge and
understanding of labour law through your ability to:

1. Explain the meaning and purpose of “labour law”;

2. Name and discuss the sources of labour law;
3. Discuss, and differentiate between, the application of the Labour Relations Act 66 of 1995 (LRA)
and the Basic Conditions of Employment Act 75 of 1997 (BCEA);
4. Define, and differentiate between, individual and collective labour law (see also paragraph 39.01);
5. Explain the dispute resolution structures for labour matters;
6. Apply the abovementioned principles/law to relevant but unfamiliar scenarios to solve practical
problems.

Purpose of labour law

 Labour law is the body of rules and regulations that regulate the relationships between all the
players in the world of labour.
 In the past labour law was based on common law.
 Common law rules meant that employment contracts were based on freedom and sanctity of
contracts.
 This meant that parties in the employment contract were free to conclude contracts no matter how
unfair terms and conditions were (freedom).
 Parties had to absolutely abide by the terms and conditions of the contract even though they were
unfair. (sanctity of contracts.)
 This meant that equity and fairness were not important in the employment contracts.
 Since the bargaining power between employers and employees was not balanced, employees found
themselves in unfavourable positions as employers had the power to initiate employment contracts
that unfairly favoured them.
 This was at the expense of the employees who were and are still desperate for employment.
 The current labour laws were introduced to primarily:
- Ensure that employees have access to employment.
- Ensure that employment relationship between employers and employees is fair to both parties
by balancing the bargaining power.
- Ensure that the socio-economic circumstances of employees are improved.
- Ensure that the economic development aspirations of the nation are achieved.

Sources of labour law

The LRA, BCEA and EEA are main sources of labour law.

On paragraph 37:16 Note other legislation that regulates related matters that are related to the
employment relationship.

Textbook:

LRA, BCEA and EEA are the primary statutes that regulate labour law in South Africa.

However, there are a number of other pieces of legislation that are relevant, including:

(a) The National Minimum Wage 9 of 2018;

(b) The Occupational Health and Safety Act 85 of 1993;

(c) The Compensation for Occupational Injuries and Diseases Act 130 1993;

(d) The Unemployment Insurance Act 63 of 2001; and

(e) The Skills Development Act 97 of 1998.

All these legislation aim to give effect or ensure that that the Constitutional right to fair labour practice
is realised by all players in the employment relationship.
The Constitution of the Republic of SA, 1996 as the supreme law of the land provides for:
→ The right fair labour practice
→ The right to freedom of association These rights are available

→ The right to participate in collective bargaining to both the employees and

→ The right to strike employers.

→ The right not to be dismissed unfairly

The Labour Relations Act 66 of 1995 (Hereinafter referred ‘LRA’)

◆ The purpose of this Act:
 To promote economic development aspirations of the nation.
 To promote social justice in ensuring that people have access to employment.
 To promote harmony in employment relationships.
 To promote freedom and justice in employment relations by promoting the aims of the Act which are to
give effect to the Constitutional rights found in section 23 of the Constitution, to provide for fair and
peaceful collective bargaining for the determination of the terms of employment, for the establishment
of forums and resolution of disputes.
◆ The LRA regulates collective rights which are found in the relationship between the trade unions
that represent employees or other groups and employers.
◆ The LRA also regulates individual rights in the relationship between an individual employee and
the employer. These rights are right to fair labour practices and right not to be unfairly dismissed.
◆ The LRA gives effect to the Constitutional right found in section 23 of the Constitution.

The Basic Conditions of Employment 75 of 1997 (‘BCEA’)

 This Act gives effect to the Constitutional rights found in section 23 of the Constitution.
 It fulfils the aims of the Act which is to promote economic development and social justice.
 This is done by providing basic terms of employment such as working hours, leave and overtime.

The Employment Equity Act 55 of 1998 (‘EEA’)

The objective of EEA is to give effect to the constitutional right to fair labour practice by:
 Prohibiting unfair discrimination in order to promote fair access of employment.
 Providing for affirmative action to remedy the unfairness that was prevailing in the past
employment space.
Individual and Collective labour law
In order to understand the difference between individual and collective labour law you need to
understand two distinct disputes which are disputes of existing rights and disputes of interests.

Individual labour law

Individual labour law is about existing rights

Disputes of existing rights

Example 1: The employment contracts of all the employees of Exact Bakers (Pty) Ltd (‘Exact Bakers’)
provide that the hourly rate for overtime is R80 instead of the normal hourly rate which is R60. At the
end of the month the employer pays R60 instead of R80 for overtime.

This is a dispute of an existing right provided in the contract and such disputes are resolved through
arbitration and adjudication.

There are many existing rights some are provided by legislation such as right not to be unfairly
dismissed. Such disputes are resolved through arbitration and adjudication.

This is individual labour law.

Collective labour law

Collective labour law is about interests that alters the employment terms.

Disputes of interests
Example 2: The employer usually gives annual increases to its employees after negotiations between
the trade unions and representatives of the employer. The employees in the year 2021 demand 7.5%
and the employer offers 4%. This is the creation of new terms of employment.

The dispute between the employees and the employer may be resolved through collective bargaining,
strikes and lockouts. These are actions that are embarked on by employees as a group through trade
unions. This is a dispute of interests.

This is collective labour law.

Dispute resolution structures

 Disputes in employment can be about existing rights or about interests.
 These disputes can be resolved by Commission for Conciliation Mediation and Arbitration
(‘CCMA’) and by Bargaining councils if accredited.
 CCMA’s function is to resolve disputes through conciliation and if it fails through arbitration.
 CCMA is an accessible, speedily and cost-effective forum for dispute resolution.
 Other dispute resolution forums are Labour court and Labour Appeal court.
 The Labour Court has the same status as the High Courts and its important function is to hear
reviews of arbitrations for unfair dismissal and unfair labour practice disputes and to also:
→ To hear referrals directly to it, if conciliation fails in matters such as unfair dismissals, dismissal for
operational requirements, dismissals for participation in unprotected strikes, and certain categories of
unfair labour practice.
 Labour Appeal Court has the exclusive jurisdiction to hear appeals from Labour court.
 It can confirm, change or set aside the decision of the Labour court.
 It has the same status as the Supreme Court of Appeal and it is the highest court of appeal.
 Note that the Constitutional court can also hear labour matters when constitutional issues arise in
cases.
SU 2: Individual Labour Law

Learning material

1. Business Law chapter 38 paragraphs 38.01 – 38.40

2. Additional class notes

Learning objectives

At the conclusion of this study unit, you should be able to demonstrate your knowledge and
understanding of labour law through your ability to:

1. Explain the concept of “employment contract”, “employer” and “employee”;

2. Differentiate between employees in terms of the LRA and persons excluded from the Act;
3. Distinguish the employment contract from other related contracts;
4. Explain the organisation, subordinate/control and dominant impression test;
5. Discuss the presumptions regarding employees;
6. Briefly explain the various forms of employment and determine when the LRA will apply;
7. Describe the general duties of the employer;
8. Describe the general duties of the employee;
9. Explain vicarious liability and list the requirements for the employer to be held liable;
10. Explain restraints of trade in the context of employment contracts;
11. Discuss the termination of a contract of employment;
12. Apply the abovementioned principles/law to relevant but unfamiliar scenarios to solve practical
problems.

Introduction
❖ Employment contract refers to an agreement between an employer and the employee where the
employee renders services to the employer in exchange for remuneration.
❖ In the past employment relationships were solely based on employment contracts.
❖ This meant that the existence of the employment relationship depended on the existence of the
contract.
❖ This created challenges because employers disguised employment relationships as other contracts
in order to avoid compliance with labour law rules.
❖ This led to prejudice to employees who did not have employment contracts but in reality worked
as employees.
❖ Since the law looks at substance over form, there are factors that determine whether a relationship
is an employment relationship or not regardless of how the relationship is labelled.
❖ This unit will among other things seek to answer the question as to what is an employment
relationship, different types of employment, duties and rights of employers and employees.
Definition of an employee in terms of the Labour Relations Act
Textbook:
The LRA defines an employee as:
(a) Any person, excluding an independent contractor, who works for another person or for the State
and who receives, or is entitled to receive, any remuneration; and
(b) Any other person who in any manner assists in carrying on or conducting the business of any
employer.

However, there are certain categories of employees who are excluded from the protection of the LRA.
These categories are:
(a) Members of the Defence Force; and
(b) Members of the State Security Agency.

Explanatory notes:

 This definition is limited because it is very difficult to distinguish between an employee and an
independent contractor.
 Thus, there are common law principles that have been created to distinguish between employees
and independent contractors.
 They are control/subordination, organisation and dominant impression test.
 Control test/subordination entails the right of the employer to supervise or instruct and
examine the work of the employee.
 Organisation is whether the person who is rendering work forms part or is incorporated in the
organisation.
 Dominant impression test refers to looking carefully all the factors that should be considered
to determine whether there is an employment relationship. All aspects of the relationship should
be examined. Not a single factor can be used to come to a conclusion but all factors should be
used.
- See the factors in paragraph 38: 09 (a) – (g).
Textbook:
The third test, which is the Dominant Impression Test, requires that a number of factors be taken into account.
In terms of this test, all aspects of the relationship must be considered and no single, independent factor should
be used to conclusively determine the existence of an employment relationship. Control, for example, is but
one of the factors to be taken into account. Other factors include:
(a) the extent to which the individual economically depends on the employer;
(b) whether the individual is only allowed to work for the employer;
(c) whether the individual must personally perform his duties;
(d) whether the individual has set working times;
(e) whether the individual is paid a monthly salary;
(f) whether the individual is provided with equipment and other tools; and
(g) whether the employer has the right to discipline the individual.
- The question to be answered is whether looking at all the factors in the relationship, is the dominant
impression indicating that there is an employment relationship or not.
 The legislators have also introduced provisions to determine whether there is an employment
relationship or not.
 Presumption as to who is an employee in terms of LRA:
 Section 200A provides that any person working or rendering a service to another is presumed
to be an employee if any one of the factors or criteria are present. This is regardless of any
contract between the parties. Study the criteria on paragraph 38:11.
Textbook:
Section 200A was introduced into the LRA in 2002. The purpose of the section was to increase the level of statutory
protection afforded to employees, by making it more difficult for employers to disguise employment relationships
and thereby deprive employees of their statutory rights. According to section 200A, a person who works for, or
renders services to any other person is presumed to be an employee if any one or more of the seven criteria set out
in the section are met. This applies, irrespective of the type of contract that may exist between the parties. The seven
criteria are:
(a) The person’s work is subject to the control or direction of the other person.
(b) The persons hours of work are subject to the control of the other person;
(c) In instances where a person works for an organisation, the person forms part of the organisation;
(d) The person worked for the other person for an average of at least 40 hours per month over the last three months;
(e) The person is economically dependent on the other person;
(f) The person is provided with tools of trade or work equipment by the other person; or
(g) The person only works for or renders services to that one person.
However, the presumption only applies to employees earning below the income threshold,
which is currently set at R205 433 per annum.

 This is only applicable to persons who are earning below R 205 433.00 per annum.
 The aim of this provision is to prevent employers from disguising employment contracts as
other contracts in order to avoid compliance with labour laws that seek to protect employees
particularly vulnerable employees.
 If one of the criteria is present, then the employer will be given an opportunity to disprove that
the person is an employee, if he fails, then the person will be deemed an employee.
 The Code of Good practice: Who is an employee found in the LRA also provides clarity on who
is an employee.

Types of employment
Permanent employees (typical or standard forms of employment)
 There are standard employees who are permanent employees.
 They usually work from 8h00 to 16h00 from Monday to Friday at the premises of the employer.
Atypical (non-standard forms of employment)
Temporary employment service (TES)
 Example: Rapid cleaning CC a labour broker employs Tim to provide a service to TUM (Pty) Ltd
a client.
- Here Rapid cleaning is an employer of Tim
- Tim is an employee of Rapid cleaning
- TUM is a client to Rapid cleaning.
- This relationship is open to abuse because the client enjoys the benefits of employers but is not
obliged to comply with labour laws. E.g complying with the rules of fair dismissals.
- Rapid cleaning is the one that must comply with labour laws when dealing with its employee
Tim.
- Only in limited circumstances can TUM be held jointly and severally liable with Rapid
cleaning. (Breaching collective bargaining agreements, arbitration award, BCEA and any
sectoral determination)
- The LRA has introduced further protection to employees in section 198A and thus, Tim will be
regarded as an employee of Rapid not TUM if performs temporary work as defined by LRA
and LRA provides that temporary service arise when:
o Period of service by Tim to TUM does not exceed 3 months
o If Tim works as a substitute for an absent employee of TUM
o For any period or any type of work that is declared to be temporary service by collective agreement
at bargaining council, sectoral determination or notice published by the minister. E.g Cleaning
examination centres for TUM.
- If none of these are present, then Tim will be regarded as an employee of TUM as the work will
be deemed to be permanent work.
- Tim will thus be treated as employee of TUM and will be deemed to be employed permanently.
- Note well this protection is available to employees who earn R 205 433 or less per annum.
 To sum up:
- If Tim is rendering genuine temporary work irrespective of how much he is earning, Rapid
cleaning will be his employer not TUM.
- Where Tim is earning R205 433 or less per annum and he is not actually rendering temporary
service as provided in section 198A he will be deemed to be an employee of TUM. This is
because TUM and Rapid have disguised permanent work as temporary work to avoid
compliance with labour laws.
Fixed term contracts
➢ An employer may in terms of section 198B (3) employ an employee on fixed term basis for more
than three months only if the work is:
- Limited or of definite period.
- There is a justifiable reason why the work should be more than three months.
➢ If the aforementioned requirements in section 198B(3) are not complied with and the employee:
- Earns R 205 433 or less per annum.
- The employer employs 10 or more people
- The employer employs 10 or more people but less than 50 people and has been in business for
more than two years or more.
➢ Then section 198B(5) of the LRA provides that the employee will deemed to be employed
permanently and must not be treated less favourably than other employees doing the same work
unless there are justifiable reasons.
- This protection is meant to prevent employers from disguising permanent employment as fixed
term in order to avoid labour laws that protect employees.

PLEASE NOTE THE DEFINITION OF FIXED TERM CONTRACT AND ALSO NOTE THE
CIRCUMSTANCES THAT ARE REGARDED AS JUSTIFIABLE REASONS FOR FIXED TERMS
THAT EXCEED 3 MONTHS.

Part time employees

◆ Section 198C of the LRA
- These are permanent employees who work less hours than the permanent employees who work
normal or full hours.
- In the past part-time employees were subjected to unfair terms and conditions of employment
compared to full time workers doing the same work.
- The employees will receive protection provided they earn:
 R205 433 or less per annum
 Works for minimum of 24 hours per month.
 Has finished a continues period of 3 months working for the employer.
 Their employer employs 10 or more employees.
 Employer employs 10 or more but less than 50 and has been in business for two or more
years.
- The protection afforded is that the employee must not be treated less favourably than the
employee working fulltime unless there are justifiable reasons.
- This protection relates to remuneration, terms and conditions of employment and benefits.
The role of common law
 The principles of common law of contracts remain applicable in the regulation of employment
relationship.
 The principles are:
→ Duties of parties in the contract
→ Vicarious liability
→ Restraint of trade

Duties of employers and employees.

Study the duties of employers and employees on paragraph 38.34 and 38.35 as they are easy to
comprehend.

Textbook:

Duties of the employer

To receive the employee into service Employees are employed in order to render services to the
employer. In order for them to do this, the employer has an
obligation to allow them to commence work. The date on
which they must be taken into service will usually be set out
in a contract of employment.

To remunerate the employee The most important obligation that the employer has is to pay
the employee the agreed on remuneration. Payments must be
made regularly and consistently.

To provide safe working conditions This duty requires that the employer provide the employee
with safety devices needed to do the job. For example, certain
jobs require the provision of safety clothing, the installation
of safety devices, the supply of safe machinery and tools. The
employer must ensure that equipment is in good working
order and that safe processes and procedures are in place and
are being enforced. In essence, the employer must take
reasonable steps to ensure the safety of its employees.

Besides this being a common-law duty, the Occupational

Health and Safety Act 85 of 1993 also places an obligation on
the employer to provide and maintain a working environment
that is safe and without risk to the health of employees. When
an employee is injured at work, the Compensation for
Occupational Injuries and Diseases Act 130 of 1993 (COIDA)
provides for the payment of compensation to the employee.
 Duties of the employee

To enter and remain in service The employee must make his/her personal services available to the
employer. The employee cannot get someone else to work on
his/her behalf. The employee must be available to work as per the
working hours agreed on.

To perform the work with reasonable An employee is employed following a recruitment process at
competence and efficiency which his/her suitability was assessed. Employees are therefore
recruited based on their competence, skills and suitability to
perform the duties associated to the position. Once the employee
is appointed, it is expected that he/she has the ability to do the job
and it is therefore expected that the employee perform the duties
with reasonable competence.

To be respectful and obey lawful and The employer stands in a position of authority and has the right to
reasonable instructions of the employer issue instructions to the employee, which must be performed as
long as the instruction are reasonable and lawful. There must be a
cordial relationship between the parties, which requires the
employee to be respectful.

To refrain from misconduct Employees must behave in accordance with the rules and
standards set by the employer.

To serve the employer’s business The employee must place the interests of the employer first. This
interests and to act in good faith requires conducting oneself in a manner that does not pose a
conflict of interest. An employee has a duty to render services
faithfully and in a manner that does not harm the trust relationship.
Disclosing information to the opposition or using the employer’s
information for personal gain goes against this duty.

Vicarious liability
❖ Vicarious liability entails the employers’ liability for employees’ wrongful actions.
❖ Let’s use an example here to explain the doctrine of vicarious liability:
❖ e.g Vic is employed as one of the brick layers for Timothy Builders CC. The CC has concluded a
contract with Ray for the CC to build a house for Ray. While building the house, Vic negligently
forgets to remove the scaffolding after use. The scaffolding falls and breaks the glass door of the
house that is worth R 100 000.
- Here there is an employment relationship between the CC and Vic
- A wrongful act of failing to remove the scaffolding has been committed by Vic.
- Vic committed the wrongful act within the scope of his employment
❖ Thus, because all the three requirement are present in the case, the CC as Vic’s employer will be
vicariously liable for the damage caused by Vic. In other words it will be held responsible for the
damage caused by its employee.

Restraint of trade
 Restraint of trade in an agreement that will prevent employees who intend to leave their
employment to do the same work that they have been doing in the employment for a period of time
and within a certain area.
 The aim is to protect the business interests of the employer.
 Restraints of trade must not be against public policy.
 Restraints of trade should be reasonably necessary to protect the employer.
 The duration, the area of restraint of trade, the aim of restraint and whether it aims to prevent the
employee to use his skills or expertise are important factors to determine reasonableness of the
restraint of trade.
 E.g. Zac an employee who specialises in repairing TV sets at TV Experts CC can be prevented
from starting a TV repairing business for three years after leaving employment and within a radius
of 15 km from the premises of TV Experts CC.

Termination of employment
 Employment can be terminated by either party upon the provision of a notice.
 Notice does not prevent the employee to dispute unfair dismissal.
 It also does not prevent the employer to summarily dismiss the employee.
SU 3: The Basic Conditions of Employment Act, the Labour Relations Act and the
Employment Equity Act

Learning material

Business Law chapter 38 paragraphs 38.41 – 149

Learning objectives

At the conclusion of this study unit, you should be able to demonstrate your knowledge and
understanding of labour law through your ability to:

1. Discuss the application of the BCEA;

2. Discuss the minimum conditions of employment required by the BCEA;
3. Discuss enforcement of the BCEA;
4. Describe the concept of "dismissal" as per the LRA;
5. Define the concept of “unfair dismissal”;
6. Explain, and differentiate between, substantial and procedural fairness in the context of dismissals;
7. Discuss the requirements of a fair dismissal in the context of employee misconduct, capacity, ill
health or injury, and operational requirements;
8. Discuss constructive dismissal;
9. Discuss automatically unfair dismissals;
10. Explain the effect of the transfer of a business as a going concern on the employees of the business;
11. Define and explain the concept of “unfair labour practices”; and be able to identify an “unfair labour
practice” in terms of the LRA;
12. Discuss the scope and purpose of the Employment Equity Act, the prohibition of unfair
discrimination, and the policy on affirmative action;
13. Discuss the dispute resolution procedures and remedies with regard to dismissals, unfair labour
practices and unfair discrimination;
14. Apply the abovementioned principles/law to relevant but unfamiliar scenarios to solve practical
problems.

Introduction
Please Study the Basic Conditions of Employment on your own from paragraph 38.41 - 38.88. Note
that you may be tested and examined on the work.

Textbook:

The Basic Conditions of Employment Act

The BCEA governs the right that employees have to be provided with certain minimum conditions of
employment. In the main, the BCEA regulates working hours, overtime, leave and notice periods.
Employers are not permitted to provide less favourable conditions than those set out in the BCEA.
However, the BCEA makes allowance for the variation of certain rights in certain instances.
The rights that cannot be varied are:
(a) the maximum hours of work;
(b) the protection afforded to employees performing night work;
(c) the provision of at least two weeks of annual leave per year;
(d) the provision of four months of maternity leave;
(e) the provision of sick leave; and
(f) the prohibition on forced and child labour.

Apart from these rights, other rights can be varied through a collective agreement concluded in a
bargaining council, or through ministerial or sectoral determinations.

There are certain categories of employees excluded from the overall protection provided for in the
BCEA. In other words, the BCEA does not apply to them at all. These categories of employees are:

(a) Members of the State Security Agency; and

(b) Unpaid volunteers working for an organisation that serves a charitable purpose.

Furthermore, certain categories of employees are excluded from specific rights set out in the BCEA.
These categories are discussed in the relevant sections that follow.

Working hours
Generally, the BCEA provides the maximum number of hours that an employee can work per week, as
well as the maximum hours that an employee can work per day. An employee may not work more than
45 hours in a week. If an employee works five or fewer days a week, the employee cannot work more
than nine hours a day. If an employee works more than five days a week, the employee cannot work
more than eight hours a day.

There are certain employees who are excluded from this protection. These employees are:

(a) senior managerial employees;

(b) sales staff who travel to the premises of customers and regulate their own hours of work;
(c) employees who work less than 24 hours a month for an employer; and
(d) employees who earn in excess of R205 433 per annum.

Overtime
The BCEA provides for two restrictions on overtime work. The first is that an employee cannot be
forced to work overtime; they must agree to work overtime. Secondly, an employee cannot work more
than ten hours of overtime in a week. However, these ten hours must be spread over the week in such a
manner that an employee does not work more than 12 hours a day. It is possible for the ten hours of
overtime to be increased to not more than 15 hours of overtime a week, but this requires the conclusion
of a collective agreement.
An employee must be remunerated at a higher rate for overtime worked. The employer must pay one
and a half times the employee’s wage. If an employee is paid at the current rate of R50 an hour and the
employee works overtime, he/she must be paid at the current rate of R75 for each hour of overtime
worked.

It is possible for an employee to be awarded time off, instead of being paid for the overtime worked.
However, time off is only permitted if there is an agreement to this effect.

The overtime provisions do not apply to all employees. The employees excluded from working hour
protection as discussed above, are also excluded from overtime protection.

Compressed working week

The BCEA allows for a compressed working week. In terms of this provision, an employee can work
for 12 hours a day, including the meal interval, without receiving overtime. However, this is only
permitted if parties enter into a written agreement to this effect.

Meal intervals
An employee who works continuously for more than five hours must be given a meal interval of at least
one continuous hour. It is possible to reduce the meal interval from 1 hour to 30 minutes through a
written agreement. It is further possible to dispense with a meal interval through a written agreement if
the employee works fewer than six hours a day.

A meal interval is unpaid and is excluded from the calculation of hours of work, unless specifically
included. If an employee works from 8am to 5pm and receives a one-hour meal interval, the employee’s
working hours for the day is eight hours (nine hours minus one hour).

The meal-interval provisions do not apply to employees excluded from working hour and overtime
protection as discussed above.

Sunday work and work on public holidays

Employees who work on a Sunday are entitled to a higher rate of pay. For the purpose of determining
the rate of pay, a distinction is made between employees who ordinarily work on a Sunday and those
that do not ordinarily work on a Sunday.

An employee who ordinarily works on a Sunday is entitled to one and a half times the employees wage
for each hour worked. An employee who does not ordinarily work on a Sunday is entitled to double the
employees wage for each hour worked.

An employee cannot be forced to work on a public holiday. Such work is subject to an agreement
between the parties. If the employee works on a public holiday that falls on a working day, the employee
is entitled to be paid double the wage that the employee would have ordinarily received for that day.
Employers who do not open on public holidays are still required to pay their employees the wage that
the employee would ordinarily have received for the day, if the public holiday falls on a working day.

These provisions do not apply to employees excluded from working hour, overtime and meal interval
protection as discussed above.

Leave
There are seven types of leave recognised in the BCEA. The leave provisions apply to all employees
except an employee who works less than 24 hours a month for an employer. A diagrammatical
representation of the various types of leave and an explanation of each type of leave follow.

Annual leave
An employee is entitled to 21 consecutive days of paid leave in an annual leave cycle. By way of
agreement, it is possible to award one day annual leave for every 17 days worked. This would be
applicable to part-time workers, for example a domestic worker who works two days a week.

Annual leave must be granted not later than six months after the year in which it was due. For example,
an employee who works from January – December 2019 will be entitled to 21 consecutive days of leave
and some of these days can be taken up until the end of June 2020. However, an employee cannot as an
alternative to taking annual leave be paid for such leave.

On termination of employment, an employee must be paid for annual leave that had accrued but had
not been taken. It is however not permissible for an employee to take annual leave while serving notice
as a result of the termination of employment.
Sick leave
An employee is entitled to paid sick leave equivalent to the number of days the employee would
normally work during a six-week period for each sick-leave cycle. The sick-leave cycle is 36 months.
For example, if an employee works five days a week, the employee would be entitled to 30 days (5[days]
x 6[weeks]) of paid sick leave for a period of 36 months. However, an employee is only entitled to one
day paid sick leave for every 26 days worked during an employee’s first six months of employment.
This does not mean that the first sick-leave cycle only commences after the first six months of
employment. For example, if an employee commences work on 1 January 2019 and he/she is required
to work five days a week, he/she will be entitled to 30 days sick leave for a 36-month period (1 January
2019 – 31 December 2021). However, from January – June 2019 he/she will only be entitled to take
one day of sick leave for every 26 days worked. From 1 July 2019 the employee will not be restricted
in terms of the amount of sick leave that he/she can take subject to the maximum amount of 30 days
until 31 December 2021. However, if the employee took sick leave during the first six months of
employment, these days will be deducted from the 30 days and he/she will be entitled to the balance. If
he/she took three days as at 30 June 2019, he/she will have 27 days left for the period 1 July 2019 – 31
December 2021.

To qualify for sick leave, there is an obligation on an employee to produce a medical certificate, in
certain instances. The submission of a medical certificate applies if:

(a) the employee is off sick for more than two days; or
(b) the employee is off sick on a third occasion during an eight-week period, even if only for one or
two days.

If the employee does not provide a medical certificate under these circumstances, the employer is not
required to pay the employee.

Family responsibility leave

An employee must meet two criteria to qualify for family responsibility leave, namely he/she:

(a) must be in employment for more than four months; and

(b) must work for the employer for at least four days a week.

If an employee meets these requirements, he/she is entitled to three days paid leave in every annual-
leave cycle:

(a) when the his/her child is sick;

(b) in the event of death of his/her child, adopted child or grandchild;
(c) in the event of death of his/her spouse or life partner; or
(d) in the event of death of his/her parent, adoptive parent, grandparent or sibling.
Before granting paid family responsibility leave, it is permissible for an employer to request reasonable
proof of the event that led to the taking of family responsibility leave. For example, if it is taken due to
illness of the employee’s child, the employer can request a medical certificate which certifies that the
child was sick.

Maternity leave
An employee is entitled to four consecutive months of maternity leave for the purpose of giving birth
to a child. Such leave may commence at any time from four weeks before the expected date of birth or
from a date certified by a medical practitioner. An employee may not work for six weeks after the birth
of the child unless a medical practitioner certifies that the employee is fit to return earlier.

It is the responsibility of the employee to notify the employer in writing of the date that she intends to
commence maternity leave and return from maternity leave. This should be done at least four weeks
before the employee intends to start maternity leave.

The BCEA does not provide for paid maternity leave. However, the employee is entitled to claim
maternity benefits in terms of the Unemployment Insurance Act 63 of 2001 (UIA).

Controversy arose in the law as the provisions relating to maternity leave caters exclusively for women
who give birth. It does not cater for heterosexual and same-sex couples who have children by other
methods such as surrogacy arrangements or adoption. The only leave partially applicable under such
circumstances was family responsibility leave, which was limited to three days for the birth of a child
(family responsibility leave for the birth of a child has since been repealed). This gave rise to a push for
amendments to the BCEA, which caters for surrogacy arrangements and adoption. The BCEA has been
amended by the Labour Laws Amendment Act 10 of 2018 to provide for three additional types of
parental leave, which are discussed below.

Commissioning parental leave

An employee, who is a commissioning parent in a surrogate agreement is entitled to commissioning
parental leave of at least ten consecutive weeks. An employee who takes commissioning parental leave
may commence with such leave on the date a child is born as a result of a surrogate agreement. If a
surrogate agreement has two commissioning parents, one of the commissioning parents may apply for
commissioning parental leave and the other commissioning parent may apply for parental leave. Similar
to maternity leave, the BCEA does not provide for paid commissioning parental leave. However,
payment of parental benefits is provided for in the UIA.
Adoption leave
An employee, who is an adoptive parent of a child who is below the age of two, is entitled to adoption
leave of at least ten consecutive weeks. An employee may commence adoption leave on the date that
the adoption order is granted; or the date that a child is placed in the care of a prospective adoptive
parent by a competent court, whichever date occurs first. If an adoption order is made in respect of two
adoptive parents, one of the adoptive parents may apply for adoption leave and the other adoptive parent
may apply for parental leave. Similar to maternity leave, the BCEA does not provide for paid adoption
leave. However, payment of parental benefits is provided for in the UIA.

Parental leave
An employee, who is a parent of a child, is entitled to at least ten consecutive days of parental leave.
Such leave may commence on the day that:

(a) the employee’s child is born; or

(b) the date that the adoption order is granted or the child is placed in the care of a prospective adoptive
parent by a competent court, pending the finalisation of an adoption order.

Parental leave is gender neutral and is intended for the parent who is not the primary nurturer. In the
case of a heterosexual couple, the mother who gives birth will be entitled to maternity leave, while the
father will be entitled to parental leave. Similar to maternity leave, the BCEA does not provide for paid
parental leave. However, payment of parental benefits is provided for in the UIA.

Particulars of employment
On commencement of employment, an employee must be provided with certain written particulars,
namely:

(a) the names of the employee and employer;

(b) the job or occupation to be performed by the employee or a brief description of the work to be
done;
(c) the date of commencement of employment;
(d) the ordinary hours of work and days of work;
(e) the leave to which the employee is entitled;
(f) the employee’s wage or salary and any other cash payments that the employee is entitled to;
(g) when remuneration will be paid;
(h) any deductions to be made from remuneration; and
(i) the period of notice required to terminate the contract.
Payment of remuneration and deductions
The employee’s remuneration must be paid in rands. Remuneration can be paid daily, weekly,
fortnightly or monthly. Remuneration must be paid not later than seven days of the completion of the
period for which remuneration is payable. If, for example, remuneration is being paid for the month of
June, it must be paid not later than 7 July. Deductions can only be made from an employee’s
remuneration if it is permitted by law, a collective agreement, court order or arbitration award, or if the
employee in writing agrees to the deduction in respect of a debt.

Notice periods
The period of notice to be given by either party who seeks to terminate employment, depends on the
length of service rendered by the employee.

Forced and child labour

The BCEA prohibits both forced labour and child labour. It constitutes child labour if a child who is
under 15 years of age or is under the minimum school leaving age is allowed to work. A child is required
to attend school at least until the completion of grade 9.

The National Minimum Wage Act

A national minimum wage was recently introduced into South African Law. The National Minimum
Wage Act 9 of 2018 came into operation on 1 January 2019. The purpose of the Act is to advance
economic development and social justice by mainly improving the wages of the lowest paid workers
and protecting workers from unreasonably low wages.

The Act applies to all workers and their employers with the exception of members of the:

(a) South African National Defence Force;

(b) National Intelligence Agency; and
(c) South African Secret Service.

Worker is defined as a person who works for another person and who receives, or is entitled to receive,
payment for that work.
The national minimum wage is at the current set limit of R20 for each ordinary hour worked. However,
it is less for the following categories of workers:

(a) For farm workers it is R18 per hour.

(b) For domestic workers it is R15 per hour.
(c) For workers employed on the expanded public works programme it is R11 per hour.

The Act further establishes the National Minimum Wage Commission, whose functions include the
annual review of the national minimum wage and the making of recommendations to the Minister on
any adjustment of the national minimum wage.

Enforcement of the BCEA and the National Minimum Wage Act

The BCEA provides for the appointment of labour inspectors [section 63]. These labour inspectors have
the responsibility to promote, monitor and enforce compliance with the BCEA and the National
Minimum Wage Act [section 64] by:

(a) advising employees and employers of their rights and obligations in terms of an employment law;
(b) conducting inspections;
(c) investigating complaints;
(d) trying to secure compliance by securing undertakings or issuing compliance orders;
(e) referring disputes to the CCMA concerning failure to comply; and
(f) appearing on behalf of the Director-General of the Department of Labour in any proceedings in
the CCMA or Labour Court concerning a failure to comply.

Where a compliance order is issued, an employer must comply with the compliance order within the
time period stated in the order, unless he/she refers a dispute concerning the compliance order to the
CCMA within that period.

Apart from the above, an employee or worker (as defined in section 1 of the National Minimum Wage
Act) may refer a dispute to the CCMA concerning the failure to pay any amount owing to that employee
or worker in terms of the BCEA and National Minimum Wage Act. However, this recourse applies to
employees or workers earning R205 433 per annum or less. The CCMA must appoint a Commissioner
to attempt to resolve the dispute through conciliation. If conciliation fails the CCMA must arbitrate the
dispute [section 73A].
Explanatory notes:

Dismissal of employees
• Employers have the right to dismiss employees.
• However, dismissal should be fair.
• They should be both substantively and procedurally fair.
• Substantive fairness means an employee should be dismissed for a fair reason.
• Procedural fairness means that an employee must be dismissed only by following a fair procedure.
• Before an employee disputes dismissal must prove dismissal by an employer and the employer
must then prove that dismissal was due to a fair reason and a fair procedure was followed before
dismissal could be implemented.

Definition of dismissal
In paragraph 38.91 see actions that are regarded as dismissal and note that you may be tested or
examined on them.

Textbook:

The LRA lists six instances that constitute a dismissal [section 186(1)], namely:

a. the employer terminates the employment, with or without notice;

b. an employee employed on a fixed-term contract has a reasonable expectation that the contract will
be renewed or that he/she will be retained on an indefinite basis, however, the employer:
i. fails to renew the contract;
ii. fails to retain the employee on an indefinite basis;
iii. offers to renew the contract but on less favourable terms; or
iv. offers to retain the employee indefinitely but on less favourable terms; and
c. an employer refuses to allow an employee to resume work after being on maternity leave;
d. an employer refuses to re-employ some employees while re-employing others who were all
dismissed for the same or similar reason [that is to say, selective re-employment];
e. the employer makes continued employment intolerable and the employee terminates employment
with or without notice [that is to say constructive dismissal]; and
f. after a section 197 transfer, the new employer provides conditions or circumstances of work that
are substantially less favourable than those provided by the old employer and the employee
terminates employment with or without notice.
Substantive and procedural fairness
 Dismissals should be for fair reasons and should follow a fair procedure, if not they will be unfair
dismissals.
 There are three reasons for fair dismissal: dismissal for conduct, capacity to work and dismissal
because of operational requirements.

Dismissal for Conduct

E.g Anna is employed by Tint (Pty) Ltd a restaurant. Anna has served clients and stole the money paid
by clients. Tint (Pty) Ltd wants to dismiss Anna for theft.

Substantive fairness of a misconduct dismissal

 Note that with misconduct that is not too serious, the employer can resort to progressive discipline
such as warnings.
 Misconduct dismissal will be substantively fair if Anna breached a rule that regulated conduct in
the work place and the rule was
→ Reasonable or valid
→ Anna was aware or reasonably expected to be aware of the rule.
→ The rule against theft was consistently applied in the work place.
→ Dismissal was appropriate for the misconduct.

Procedural fairness
 Dismissal for misconduct will be fair if the employer held the disciplinary hearing against the
employee.
 The hearing should not be formal.
 The aim is to put the allegations of misconduct to the employee and to hear the other side of the
story.
 The employer must inform the employee about the allegations, inform the employee about all the
rights that she has pertaining to the hearing.
 When the employer dismisses the employee, the employee must be informed of his right to take
the matter to the CCMA.

Dismissal for capacity

 There two forms of dismissal for capacity.
 They are poor performance dismissal and ill health dismissal.
 E.g John is employed as a mechanic at Best Work (Pty) Ltd. John is unable fix cars that are brought
in by clients. Best work wants to dismiss John.
 For dismissal due to poor performance to be substantively and procedurally fair:
- Best Work must prove that John’s work fails to meet standards.
- Best work should inform John about the matter.
- Best work must investigate reasons why John is failing.
- Provide training, testing and time to improve.
- If he does not improve John must be given a hearing of poor performance.
- Before dismissal he must be given an opportunity to tell his side of the story
- Afforded representation by the trade union.
- The employer must consider lower positions for the employee.

Employees on probation
o Poor performance should be brought to the attention of the probationer
o Provided with necessary assistance.
o Their performance must be evaluated.
o Given time to improve.
o If not improving must be given an opportunity to present their side of the story.

Dismissal for ill health

◆ E.g Themba is an employee of Zico (Pty) Ltd. Themba works as an editor for Zico and due to
depression Themba cannot execute his duties. Zico wants to dismiss Themba.
◆ For dismissal to be fair:
 Zico must prove that Themba is incapacitated due to ill health.
 Before dismissal Zico must investigate the cause and extent of incapacity
 Zico should consider ways in which Themba can be accommodated.
 If incapacity is temporary, Zico should consider acquiring services of a substitute for temporary
basis.
 If incapacity is permanent, Zico should consider adapting Themba’s duties.
 Zico must consider getting appropriate tools for Themba.
 Textbook:
In considering alternatives short of dismissal a number of factors must be taken into account,
including:
(a) the nature of the job;
(b) the extent of the employee’s inability to perform;
(c) the likelihood of recovery or improvement;
(d) the size of the employer’s operations; and
(e) the effect on the employer’s operations.
 Before dismissal Zico must give Themba an opportunity to present his side of the story, and
allow the Themba to be assisted by a trade union.
Dismissal for operational requirements
Dismissal for operational requirements referrers to dismissal due to economic, technological, structural
and other similar reasons

Examples:

Zweli is an administrative employee of Venon Gymn. Due to the pandemic the demand for gym
decreased significantly. Venon Gymn wants to dismiss Zweli. (Economic reasons)

or

Venon Gymn has procured a software to do the administration of the gym and thus Zweli’s
service is no longer needed. (Technological reasons)

or

The Gymn has decided that the work of gymn administrators will be done by managers and thus
Zweli’s service is no longer required. (Structural reasons)

 For dismissal to be substantively fair, the employer must furnish evidence that dismissal is
operationally rational, this means that the reason to dismiss should be to prevent losses or collapse
of business.
 For dismissal to be procedurally fair, the employer must consult with employees or their
representatives.
 There must be a notice inviting the other party to consult and please study the information that the
notice should contain.
 The parties must engage with the aim of mitigating the negative effects of retrenchments.
 The employees must be heard on whether there are alternatives.
 If no agreement, then employer can retrench and use the agreed criteria to choose affected
employees.
 If no criteria use fair and objective criteria.
 Section 189(A) provides a special procedure when an employer embarks on large scale
retrenchments.
Transfer of business as a going concern
Section 197 of the LRA
Transfer of business as a going concern refers to the transfer of the whole or part of business from the
old owner to the new owner to operate in the same way as it was operating in the hands of the old owner.

E.g. Xoli a 100% shareholder of YouDairy (Pty) Ltd sells her business to Frans to continue to
operate it as a dairy. YouDairy employs 15 employees.

The question is what happens to the employees of the YouDairy (Pty) Ltd in the hands of the new
shareholder and owner.

Or

YouDairy (Pty) Ltd and Fresh Dairy (Pty) Ltd merges (come together to form one company) to
form YourFresh Dairy (Pty) Ltd, a bigger, efficient and more profitable dairy.

What happens to the employees in the two examples?

 Study the law that regulates these circumstances on paragraph 38.114-120.

Textbook:

Operational requirement dismissals usually come about in order for a business to stay afloat and to
minimise its losses. However, another option available to an ailing business is the sale of the business.
Of course, this is but one reason why a business may be sold.

In instances where businesses are sold, an important question that arises is what happens to the
employees of the business. Section 197 seeks to facilitate the sale of businesses, while at the same time
protecting employees from losing their jobs. It provides that if there is a transfer of a business from one
employer to another, and the business is transferred as a going concern, the following protections apply:

(a) The new employer is automatically substituted in place of the old employer in respect of all
employment contracts in existence immediately before the transfer.
(b) Any rights and obligations between the old employer and employee at the time of transfer continue
as if they are rights and obligations between the employee and the new employer.
(c) The transfer does not interrupt an employee’s continuity of employment.

In terms of the above, the employees’ terms and conditions with the new employer does not have to be
identical to those that existed with the old employer but must on the whole not be less favourable.

It is noteworthy that the word “transfer” and not “sale” is used. This is because the protection provided
by section 197 applies to broader aspects than the sale of a business. In addition to sale, transfer includes
other transactions such as mergers.
“Going concern” means that the same business must continue to operate in different hands. For example,
if a restaurant is sold, it will be regarded as a transfer of a going concern, if it continues to operate as a
restaurant in the hands of the new employer.

Another important aspect is the definition of “business”. It is defined as “the whole or part of any
business, trade, undertaking or service”. It is clear from this definition that a business does not have to
be transferred in its entirety for section 197 to apply. The inclusion of the word service in the definition
has led to outsourcing arrangements, even of non-core activities, being treated as the transfer of a
business.

Essentially, employees are entitled to continue in employment on the same terms and conditions when
the business in which they work is transferred to another employer and after the transfer it remains
essentially the same business.

Application of section 197A

E.g. Xoli a 100% shareholder of YouDairy (Pty) Ltd sells her business to Frans to continue to operate
it as a dairy. The reason for sale is because the business is insolvent, in other words it is not financially
viable and Frans has the resources to make it viable again. YouDairy employs 15 employees.

 The new employer is substituted for the old employer in all the contracts before provisional
winding up of old employer.
 Any rights and obligations between old employer and the employees remain the rights of the old
employer and employees.
 Transfer of business does not disturb employees’ continuity of employment.

Automatically unfair dismissal

Dismissal can be unfair and will be automatically unfair if it is not due to misconduct, capacity or
operational requirements.

There are eight circumstances that will render dismissal automatically unfair:

Study the circumstances on your own on paragraph 38: 122 (a) – (h).

Textbook:

In addition to a dismissal being unfair (if it is not for one of the three recognised reasons, namely
conduct, capacity or operational requirements), a dismissal can be automatically unfair. There are eight
circumstances under which a dismissal can be regarded as automatically unfair, namely as a result of:

(a) the employee participating in or supporting a protected strike;

(b) the employee refusing to do work normally done by an employee engaged in a protected strike;
(c) the employee refusing to accept a demand in respect of a matter of mutual interest;
(d) the employee exercising any of his/her rights provided for by the LRA;
(e) the employee’s pregnancy, intended pregnancy or reason related to pregnancy;
(f) unfair discrimination by the employer against the employee;
(g) a section 197 or 197A transfer or reason related to such a transfer; and
(h) the employee having made a protected disclosure as defined in the Protected Disclosures Act 26
of 2000 (PDA).

Note that factor (h) referrers to circumstances where the employee has become a whistle-blower.

Unfair labour practices

◆ In addition to the right not to be unfairly dismissed, employees have the right not be subjected to
unfair labour practice
◆ See the definition of unfair labour practice as provided by section 186(2) of the LRA.
◆ Study the list on your own on paragraph 38:124
Textbook:
Section 186(2) of the LRA defines an unfair labour practice as any unfair act or omission that arises
between an employer and an employee in relation to:
◆ Specific unfair labour practices (study the explanations on your own on paragraph 38.126-38.130
- In terms of promotion (unfairly overlooked for promotion)
- In terms of demotion (reduction of remuneration or reduction of work)
- In terms of benefits (unfairly denying benefits to the employee)
- In terms of unfair suspension (unfairly suspending the employee as punishment or unfairly
suspending the employee for precautionary reasons (when employer suspects that the employee
has committed a misconduct and embarks on investigation)
- Occupational detriment (intimidation by employer as a result of an employee deciding to be a
whistle blower.)

Textbook:

Specific unfair labour practices

The most pertinent unfair labour practices are discussed below.

Promotion
An employee can institute action against an employer if the employee feels that he/she were unfairly
overlooked for promotion. The onus is on the employee to prove first that the employer refused to
promote him/her and, secondly, that the decision of the employer was unfair. However, this recourse
can only be used by existing employees and not by an external candidate who applies for a position. In
such cases, unfairness will not be construed merely because the employer failed to appoint the best
candidate. What is important is that the employer must be able to provide a justifiable reason for
preferring one candidate over another. In instances where the employer has a prescribed recruitment
procedure, this procedure must be adhered to.

Demotion
In demotion cases, an employee must prove that he/she was subject to a demotion and that the demotion
was unfair. Demotion usually occurs where an employee suffers a reduction in remuneration. However,
a demotion also occurs where an employee’s remuneration remains unchanged but the employee’s
status and responsibilities are reduced.

Benefits
There has been controversy in defining what constitutes a benefit. The initial approach was to limit the
definition of a benefit to include aspects that did not form part of an employee’s remuneration. However,
the concept of a benefit has been expanded. Currently aspects such as pension contributions, medial aid
contributions, housing allowances, motor vehicle and transport allowances, performance bonuses can
constitute a benefit. The only requirement is that the benefit must be a pre-existing benefit. In other
words, there must be a pre-existing claim to the benefit which can arise from contract, policy, or
practice, even if the provision of the benefit is subject to the exercise of employer discretion.
Unfair suspension
Suspensions can arise in two instances. It can constitute a sanction following a disciplinary hearing.
However, it can also serve as a precautionary measure, in which case it is referred to as a precautionary
suspension. An employee can institute an unfair labour practice dispute to challenge the fairness of
either type of suspension.

Occupational detriment
Occupational detriment occurs when an employee discloses information about the improprieties being
committed by his/her employer. Essentially, the employee becomes a whistle blower. In order to
encourage such conduct by employees, which essentially exposes corruption and other acts of illegality,
employees are protected in terms of the PDA. However, in order to receive such protection, the
disclosure made by the employee must constitute a protected disclosure as defined in the Act. It must
disclose the type of information specified in the Act and it must be made to the persons or institutions
designated in the Act. If the disclosure constitutes a protected disclosure and the employee is subjected
to an occupational detriment for making such a disclosure, this will qualify as an unfair labour practice.
An occupational detriment includes being disciplined, harassed, intimidated, unfairly overlooked for
promotion and transferred against the employee’s will.

Employment Equity Act

Please study this section of the work on your own from paragraph 38.131 - 38:149. Note that you may
be tested and examined on this part of the work.

Textbook:

Apart from the unfair labour practice provisions discussed above, the EEA also provides protection to
employees who are still in employment. As stated in chapter 37, the EEA has two main purposes,
namely (i) eliminating unfair discrimination in employment [Chapter II]; and (ii) implementation of
affirmative action measures in the workplace [Chapter III].

Chapter II applies to all employers, irrespective of the size or turnover of the business and also applies
to job applicants for employment. Chapter III applies to designated employers and designated groups
and requires such employers to implement affirmative action measures in the workplace [section 1].

The EEA as a whole does not apply to:

(a) members of the National Defence Force;

(b) members of the National Intelligence Agency;
(c) members of the South African Secret Service;
(d) members of the South African National Academy of Intelligence; and
(e) the directors and staff of Comsec. [Comsec is an Electronic Communications Security (Pty) Ltd
owned by the National Intelligence Agency whose main purpose is to protect government
communications against unauthorised access, electronic, technical, and other threats.]
Prohibition on unfair discrimination
The EEA provides that every employer must take steps to promote equal opportunity in the workplace
by eliminating unfair discrimination in any employment policy or practice [section 5]. It contains 20
prohibited grounds of unfair discrimination. It states that no person may unfairly discriminate, directly
or indirectly, against an employee, in any employment policy or practice, on one or more grounds,
including race, gender, sex, pregnancy, marital status, family responsibility, ethnic or social origin,
colour, sexual orientation, age, disability, religion, HIV status, conscience, belief, political opinion,
culture, language, birth [section 6]. The 2014 amendments to the EEA extends the prohibition against
unfair discrimination to include “any other arbitrary ground” which is in line with section 187(1)(f) of
the LRA dealing with discriminatory dismissals.

The amendments also introduced the principle of equal pay for work of equal value which entails that
a difference in terms and conditions of employment between employees of the same employer
performing the same or substantially the same work or work of equal value that is directly or indirectly
based on one or more of the grounds listed earlier, will constitute unfair discrimination. The Minister
may, however, after consultation with the Employment Conditions Commission prescribe the criteria
and methodology for assessing work of equal value.

Harassment of an employee is also regarded as a form of unfair discrimination and is prohibited on any
one, or a combination of grounds of unfair discrimination listed earlier. Harassment in the workplace
can take on many forms such as harassment based on race, sex, religion, non-disclosure of an
employee’s pregnancy while sexual harassment is the most common form that is found. Sexual
harassment is regarded as unwelcome conduct of a sexual nature that violates the rights of an employee
and constitutes a barrier to equity in the workplace.

It takes into account factors such as:

(a) whether the harassment is on the prohibited grounds of sex and/or gender and/or sexual orientation;
(b) whether the sexual conduct was unwelcome;
(c) the nature and extent of the sexual conduct; and
(d) the impact of the sexual conduct on the employee [of Code of Good Practice on the Handling of
Sexual Harassment Cases GG 27865 Item 4].

The EEA contains two defences against alleged unfair discrimination, where discrimination is
permissible.

It is not unfair discrimination to:

(a) take affirmative action measures consistent with the purpose of the EEA Act; or
(b) distinguish, exclude or prefer any person based on an inherent requirement of a job.

Affirmative action
The second purpose of the EEA deals with implementing affirmative action measures in the workplace
by designated employers for designated employees in order to ensure employment equity. “Affirmative
action measures” is defined as “measures designed to ensure that suitably qualified people from
designated groups have equal employment opportunities and are equitably represented in all
occupational categories and levels in the workforce of a designated employer”.
A designated employer is:
(a) an employer who employs 50 or more employees;
(b) an employer who employs fewer than 50 employees but whose annual turnover exceeds the relevant amount
stipulated in Schedule 4 to the Act;
(c) a municipality;
(d) an organ of state which excludes the South African National Defence Force, the National Intelligence
Agency and the South African Secret Service; and
(e) an employer appointed a designated employer in terms of a collective agreement in terms of section 23 or
31 of the LRA to the extent provided for in the agreement.

A designated group in favour of whom affirmative-action measures must be adopted includes black
people, women and people with disabilities. “Black people” is the generic term used to include
“Africans, Coloureds and Indians”. “People with disabilities’ means “people who have a long-term or
recurring physical or mental impairment which substantially limits their prospects of entry into, or
advancement in, employment” [section 1].

The 2014 amendments to the EEA also makes it evident that black people, women and people with
disabilities are designated groups if they:
(a) are citizens of the Republic of South Africa by birth or descent; or
(b) became citizens of the Republic of South Africa by naturalisation (i) before 27 April 1994; or (ii) after 26
April 1994 and who would have been entitled to acquire citizenship by naturalisation prior to that date but
who were precluded by apartheid policies.

The EEA also provides that only suitably qualified persons may benefit from the implementation of
affirmative action measures in the workplace. A person from the designated group may be regarded as
being suitably qualified for a job either as a result of any one or a combination the said person’s:
(a) formal qualifications;
(b) prior learning;
(c) relevant experience; or
(d) capacity to acquire, within a reasonable time, the ability to do or perform the job [section 20(3)].

The EEA places the following duties on a designated employer regarding the implementation of
affirmative action in order to achieve employment equity, namely:
(a) consult with their employees regarding the implementation of affirmative action;
(b) collect information and conduct an analysis of its employment policies, practices, procedures and the
working environment in order to identify employment barriers which adversely affect people from a
designated group;
(c) prepare an employment equity plan (EEP) and implement it; and
(d) report to the Director-General on progress made on the implementation of the EEP.

Dispute Resolution
Dismissals
An employee who wishes to challenge the fairness of the employee’s dismissal must complete the
prescribed form and lodge the dispute with the CCMA or Council (if the parties to the dispute fall within
the registered scope of a council). This must be done within 30 days of the date of dismissal. The CCMA
or Council will attempt to resolve the dispute through conciliation. If conciliation fails, the employee
must request that the dispute be arbitrated by the CCMA or Council where the dispute is in respect of a
dismissal for conduct or capacity.

In respect of a dispute regarding a dismissal for operational requirements, the employee must refer the
dispute to the Labour Court for adjudication where the dispute is not resolved through conciliation.
However, such disputes can be referred for arbitration to the CCMA or Council, instead of for
adjudication. This applies if only one employee was dismissed or the employer employs less than ten
employees.

In respect of an automatically unfair dismissal dispute, if conciliation fails to resolve it, it must be
referred to the Labour Court for adjudication.

Below is a diagrammatical illustration of unfair dismissal disputes.

Unfair labour practices

An employee who wishes to challenge the fairness of his/her employer’s conduct in respect of one of
the unfair labour practices must complete the prescribed form and lodge the dispute with the CCMA or
Council (if the parties to the dispute fall within the registered scope of a council). This must be done
within 90 days of the date of the act which allegedly constitutes an unfair labour practice.

The CCMA or Council will attempt to resolve the dispute through conciliation. If conciliation fails, the
employee must request that the dispute be arbitrated by the CCMA or Council. This applies to all unfair
labour practices except one. An alleged unfair labour practice for being subjected to an occupational
detriment for having made a protected disclosure must be referred to the Labour Court for adjudication
if conciliation fails.

Unfair discrimination
Any dispute concerning unfair discrimination must be referred to the CCMA for conciliation within six
months after the act or omission that allegedly constitutes unfair discrimination. If such a dispute
remains unresolved after conciliation, any party to the dispute may refer it to the Labour Court for
adjudication.

Remedies for unfair dismissal and unfair labour practices

If an employee’s dismissal is found to be unfair or an unfair labour practice is found to have been
committed, the remedies that apply are:
(a) reinstatement;
(b) reemployment; and
(c) compensation.
SU 4: Collective Labour Law

Learning material

Business Law chapter 39 (read paragraphs 39.07 – 39.14 on your own)

Learning objectives

At the conclusion of this study unit, you should be able to demonstrate your knowledge and
understanding of labour law through your ability to:

1. Define the concepts "collective bargaining", "trade union" and "bargaining councils";
2. Discuss collective agreements and the legal effects of a collective agreement;
3. Define the concepts "strike" and "lock-out";
4. List and explain the requirements for protected strikes and lock-outs;
5. Discuss the limitations on strikes and lock-outs;
6. Discuss, and differentiate between, the consequences of protected and unprotected strikes and
lock-outs;
7. Discuss secondary strikes, picketing and protest action;
8. Apply the abovementioned principles/law to relevant but unfamiliar scenarios to solve practical
problems.

Introduction
• Section 23(2) of the Constitution provides the right to form, join, participate in activities of the
trade union and the right to strike.
• Section 23(5) of the Constitution provides that every trade union, employers’ organisation, and
employer have the right to engage in collective bargaining.
• Thus, collective labour law gives effect to the rights provided by the constitution.
• It the body of rules and regulations that regulate the collective relationship between employees and
employers to participate in collective groups for the purposes of collective bargaining
(negotiations) pertaining to wages, terms and conditions of employment, labour activities such
strikes and lockouts and other matters of mutual interest.
• The relevant rules of Labour Relations Act give effect to the rights provided in the Constitution.
• This unit deals with this area of labour law.

What is collective bargaining?

Collective bargaining refers to negotiations between a group of employees and employer(s) with the
aim determining wages, terms and conditions of employment and other matters of mutual interest.

E.g SADTU locked in negotiations on behalf of teachers with the Department of Education as an
employer for salary increases of educators. The outcome of the negotiation will be collective agreement
between the employer and employees.
Or NUMSA locked in negotiations with the employers’ organisation in the mining sector for wages and
improved PPE.

 This can take place at plant level e.g at a specific mine in the Northwest.
 Or at sectoral level meaning that it involves all employees in the mining sector.

Trade unions
Trade unions refer to a group or association of employees whose primary objective is to regulate the
relationship between the employees and the employer and includes the employers organisations.

How to form a trade union?

E.g. Thabo and Jan intend to form a trade union at their workplace in order to be able to collectively
raise and negotiate with the employer about the terms and conditions of employment and have a stronger
voice.
→ Thabo and Jan must complete the appropriate form.
→ Draft the constitution.
→ Submit the documents to the Registrar of labour relations.
→ The registrar will provided they comply with all the requirements issue a certificate
→ The certificate will signify that the Trade union has come into existence and the Trade union will acquire a
separate legal or juristic personality.
→ Separate legal personality means that the Trade union exists separate from its founders and members.
→ It can incur debts and have rights.
→ It can be sued or sue in its own name.
→ Acquire and dispose property.
→ Be a member of a bargaining council.
→ Conclude other agreements and collective agreements with employers.
→ And represent its members in disputes.

Bargaining Councils
 Barganing council is a body that is established by registered Trade unions and employers’
organisations of a particular sector to coordinate collective negotiations between Trade unions and
Employers organisations of that particular sector.
 Decisions reached at such councils are known as collective agreements and are implemented at
work places of registered employers’ organisations.
 E.g Metal and Engineering Industries Bargaining Council (MEIBC) which is a body of employers
in the sector and Trade unions, it is responsible for effective collective bargaining between
employers and Trade unions in the sector.
 Bargaining councils also resolve disputes between employers and trade unions and agreements can
in some cases be applied to non-members.
Collective agreements
Collective agreements are written agreements between Trade unions and employers organisations
concerning terms and conditions of employment.

Study the legal effects of collective agreements on your own and see who it binds on paragraph 39:06.

Textbook:

A collective agreement is a written agreement concerning terms and conditions of employment (or any
other matter of mutual interest) concluded by one or more registered trade unions and one or more
employers or registered employers’ organisations [LRA section 213]. Section 23(1) of the LRA contains
the legal effects of a collective agreement and it provides that a collective agreement binds:

(a) the parties to the collective agreement;

(b) each party and the members of every other party to the collective agreement, in so far as the
provisions of the agreement are applicable between them;
(c) the members of a registered trade union and the employers who are members of a registered
employers’ organisation that are party to the collective agreement if the collective agreement
regulates:
(1) conditions of employment; or
(2) the conduct of the employers in relation to their employees or the conduct of the employees in relation
to their employers;
(d) employers who are not members of the registered trade union or unions that are party to the
collective agreement if:
(1) the employees are identified in the agreement;
(2) the agreement expressly binds the employees; and
(3) the trade union that is party to the collective agreement have as their members the majority of
employees employed by the employer in the workplace.

Freedom of Association
Textbook:

The Constitution grants workers not only the right to form and join trade unions but also to take part in
the activities and programmes of trade unions. The LRA provides that employees, employers, trade
unions and employers’ organisations have the right to freedom of association [Chapter II]. The main
provisions are that every employee has the right:

(a) to form and join a trade union or federation of trade unions;

(b) to participate in the lawful activities of the trade union; and
(c) to participate in the election of any of the trade union’s office-bearers or officials and be an office-
bearer or official.
The Right to Organise
Textbook:

It is clear from the above that the right to organise and establish trade unions is recognised expressly in
the Constitution and is given effect to in Chapter III of the LRA which extends organisational rights to
registered trade unions that meet representativeness thresholds [Constitution section 23(2) and LRA
sections 11 – 22]. It should be noted that in terms of the LRA only registered unions that are
“representative” may acquire organisational rights. A representative trade union means, a registered
trade union, or two or more registered trade unions acting jointly, that are sufficiently representative of
the employees employed by an employer in a workplace. Sufficiently representative trade union is not
defined by the LRA but it is interpreted that it is a trade union that does not have as its members the
majority of employees who are employed by the employer. A majority union is a registered trade union
(or two or more registered trade unions acting jointly) that has as its members the majority of the
employees employed by an employer in a workplace. A majority trade union would thus have at least
50 per cent plus one of the employees employed in the workplace as members.

Specific organisational rights

Access to workplace
Office bearers and officials of a representative trade union are entitled to enter the workplace of the
employer to recruit members, communicate with them, serve their interests, and hold meetings outside
working hours with employees on the premises of the employer. The trade union can also hold elections
or ballots required by the trade union’s constitution on the premises of the employer.

Deduction of union subscriptions and agency fees

An employee who is a member of a representative trade union, may request, in writing, that his
employer deduct his trade union subscriptions or levies from his wage or salary. The employer must, as
soon as possible after the request, begin making the deductions and remit the deducted amount to the
trade union by not later than the 15th day of each month. This authorisation may be revoked by an
employee by means of a month’s written notice.

Leave for trade union activities

An employee who is an office-bearer of a representative trade union or of a federation of trade unions
to which the representative trade union is affiliated, is entitled to take reasonable leave during working
hours for the purpose of performing the functions of that office. The employer and the representative
trade union must agree on the number of days of leave, number of days paid leave and the conditions
attached to any leave.
Appointment of trade union representatives (shop stewards)
If there are at least ten members of a representative trade union employed at a workplace, they are
entitled to appoint a trade union representative. Trade union representatives has the right to perform the
following functions:

(1) Assist and represent employees in grievance and disciplinary proceedings in the workplace.
(2) Monitor the employer’s compliance with workplace-related provisions contained in the LRA, any
law regulating terms and conditions of employment, and any binding collective agreements.
(3) Report any alleged contravention of the workplace-related provisions of the LRA to the employer,
trade union, and any responsible authority or agency.
(4) Perform any other function agreed on between the trade union and the employer.

Disclosure of information
An employer must disclose all relevant information to a trade union representative of a representative
trade union that have as members the majority of the employees employed by an employer in the
workplace that will enable him/her to perform his/her trade union’s functions effectively; and to enable
it to consult or engage during collective bargaining effectively. An employer must also disclose, to a
workplace forum (in applicable circumstances), all relevant information that will allow the forum to
engage effectively in consultation and joint decisionmaking.

However, the employer is not required to disclose information that:

(1) is legally privileged;
(2) would mean that specific disclosure would be in contravention of a prohibition in terms of a law
or an order of court;
(3) is private personal information regarding the employee, unless he consents to disclosure of that
information; and
(4) is confidential and when disclosed, may cause substantial harm to the employer or the employee.

The employer must notify the union or workplace forum, in writing, if information disclosed is
confidential. [See the LRA section 16.]

It should be noted that a sufficiently representative trade union is entitled to access to the workplace,
deduction of union subscriptions and agency fees, and leave for trade union activities. Furthermore, a
majority union is also entitled to appointment of trade union representatives (shop stewards) and
disclosure of information.
Industrial action
 Section 23(2) of the Constitution provides the right to form, join, participate in activities of the
trade union and the right to strike.
 And other industrial actions such as right to assemble, picket, and protest.
 On the other hand employers have the right lock out employees to put pressure on them to accede
to a certain demand.
 In this section of work we will look at industrial actions such as strikes from employees to put
pressure on the employers to give in to their demands.
 The right to strike is not absolute there are substantive (laws) and procedural (processes)
requirements that should be complied with before strike can be legal.

Definition of strike and lock out

 LRA defines strike as refusal to work or obstruction of work by employees with the aim of
remedying or solving a dispute between the employees ad employer.
 E.g. Employees of UM (Pty) Ltd strike (refuse to work or obstruct work) with the aim of solving
a dispute between them and the employer UM (Pty) Ltd.
 Lock out is defined by LRA as a bar of entry to a work place by an employer to force the employees
to accept a demand in any matter of mutual interest between the employer and employee, regardless
of whether the employer breaches the workers’ employment contracts.
 E.g. UM (Pty) Ltd bar or refuses entry to the work place to workers to force them to accept a
demand in matters of mutual interests between the employer and employees.

Requirements for protected strikes and lockouts

 Protected strikes and lockouts
 Strike by UM employees and lock out by UM will be protected if:
→ The issue or dispute has been taken to the council, CCMA or bargaining council to solve. E.g wages 7%
increase
→ Certificate provided by the latter forums indicating that the dispute remains unresolved (parties cannot
reach an agreement) or 30 days or extended days have lapsed since the dispute was referred to the forum.
→ In case of strike 48 hour written notice must be given to the employer before the strike can start and in
case of lock out 48 hour written notice must be given trade union before the lockout.

Limitation of strikes and lockouts

❖ Right to strike or lockout is limited (prohibited) in circumstances where a person is part of a
collective agreement that provides that no one can strike or lockout with respect to a dispute.
 The party is part of an agreement that requires the matter to be arbitrated.
 The dispute is one that entitles the party to take it to Labour court or arbitration in terms of LRA.
 The person works as an essential or maintenance worker.
❖ Essential services referrers to services that would put the life and health of the population in danger.
E.g. Health, Safety and Security and Parliamentary work.
❖ Maintenance work refers to work that would damage the place of work or tools of work if it were
to be interrupted.

Consequences of protected and unprotected strikes and lockouts

Protected strikes and lockouts
Study the legal consequences of protected strikes and lockouts on your own on paragraph 39.22.

Textbook:

Protected strikes and lock-outs have complied with the provisions of Chapter IV of the LRA. The
following legal consequences result from protected strikes and lock-outs [section 67]:

(a) A person does not commit a delict or a breach of contract by taking part or in furtherance or
promotion of a protected strike or lock-out.
(b) An employer is not obliged to remunerate an employee for services that the employee does not
render during a protected strike or lock-out, but:
(1) if the employee’s remuneration includes payment in kind in respect of accommodation, food and other
basic amenities of life, the employer, at the request of the employee, may not discontinue payment in
kind during the strike or lock-out; and
(2) at the end of the strike or lock-out, the employer may recover the monetary value of the payment in
kind from the employee by way of civil proceedings in the Labour Court.
(c) A person does not expose himself/herself to any civil claim by taking part or in furtherance or
promotion of a protected strike or lock-out.
(d) An employee may not be dismissed for participating in a protected strike or for any conduct in
contemplation or furtherance of a protected strike.
(e) An employer may, however, fairly dismiss an employee for misconduct while participating in a
protected strike or for reasons based on the employer’s operational requirements.
(f) The failure of registering a trade union or employers’ organisation to comply with the provisions
of its constitution, requiring it to conduct a ballot of those of its members who intend to call a strike
or lock-out, does not affect the legality of a strike or a lock-out.

Unprotected strikes and lockouts

Study the legal consequences of unprotected strikes and lockouts on paragraph 39:23 – 39.25 and also
note the procedure of dismissal to participants of an unprotected strike.
Textbook:

The legal implications of unprotected strikes and lock-outs are the following in terms of section 68:

(a) The Labour Court has jurisdiction to:

(i) grant an interdict or order to restrain any person from participating or in furtherance of a strike or lock-
out; and
(ii) order the payment of just and equitable compensation for losses resulting from participating or in
furtherance of a strike or lock-out.
(a) The Labour Court may not grant any interdict unless 48 hours’ prior notice of the application has
been given to the respondent. Under certain circumstances the court may permit a shorter period
of notice.
(b) If at least ten days’ prior notice of the proposed strike or lock-out has been given to the applicant,
he/she should give at least five days’ prior notice to the respondent of the application for an
interdict.
(c) Participation in a strike that does not comply with the provisions or conduct in contemplation or
furtherance of that strike entitles the employer to fairly dismiss employees.

Participation in an unprotected strike [a strike that does not comply with the provisions of Chapter IV
of the LRA] by employees constitutes misconduct.

The employer is required, at the earliest opportunity, to contact the trade union official to discuss the
course of action it intends to adopt. The employer should issue an ultimatum, in clear and unambiguous
terms, which should state what is required of the employees and what the sanction will be if
implemented if they fail to comply with the ultimatum. The employees must be allowed sufficient time
to reflect on the ultimatum and respond to it. They can either comply with the ultimatum or reject the
ultimatum during this time. If the employer cannot reasonably be expected to extend these steps to the
employees, the employer may dispense with them. It is thus required that the employer applies the audi
alteram partem principle even when employees take place in an unprotected strike. Unprotected strikers
are entitled to be heard before being dismissed. Some form of hearing is required before the employer
can dismiss unprotected striking employees. The nature of the hearing will be determined by the
circumstances of each case; in some cases a formal hearing will be required whereas in others an
informal hearing will be sufficient. Employees should in essence be given a fair opportunity to state
their case before dismissal is effected by the employer [Code of Good Practice: Dismissal Schedule 8
Item 6(1) and 6(2)].
Secondary strikes
 Secondary strike (sympathy strike) is a strike that is embarked on in support of the strike that is
ongoing by employees of another employer.
 Requirements of secondary strike:
- Primary strike must be protected.
- 7 days’ notice to employers’ organisations or employers in that context.
- The secondary strike must be reasonable in achieving the objective of strike in the primary
employer’s business.
 It does not include a strike where the striking employees are striking for a demand which is in the
council which they form part of and have an interest in the demand.

Picketing
Picketing is a peaceful demonstration in support of a protected strike and against a lockout.

Protest action
Protest action is refusal or obstruction of work by employees to promote the socio-economic status or
circumstances of workers. E.g Where all workers are protesting for quality and efficient transport
system. Note that protests do not relate to labour interests such as wages or improved terms and
conditions of employment. These interests are usually promoted by strikes.

Requirements of protests:
 Essential and maintenance workers cannot partake.
 Initiated by federation of trade unions or registered trade unions.
 The latter must provide reasons and nature of protest to NEDLAC.
 They should also provide a 14 day notice to NEDLAC.
THEME 8: ENTREPRENEURIAL LAW

As a general introduction, read paragraph 24.01 in Business Law

Note that the lecturer may refer to specific sections of legislation of which you must take notice – your
class notes are therefore of utmost importance

Textbook:

The one-man business (sole proprietor), partnership, close corporation and company constitute the four
most important business entities that enable one to participate in the commercial world. The fact that
companies and close corporations are endowed with separate legal personality has substantial appeal
for investors. The necessity to protect the interests of the company, the shareholders, directors and
creditors inter se has led to a considerable number of statutory provisions and thus companies are
regulated by a complex system. This was the main reason for the establishment of the close corporation
in terms of the Close Corporations Act 69 of 1984, which has made it possible for entrepreneurs to
acquire the benefit of legal personality in a much less expensive and simpler way.

SU 1: Partnerships

Important: As one of the oldest business structures available, a partnership offers an association of two
or more persons with the opportunity to partake in the commercial world without having to comply
with certain prescribed procedures or statutory requirements necessary for other business entities. With
its simplified formation procedure, this business enterprise facilitates entrepreneurship and economic
growth for all inhabitants regardless of financial status as it enables contributions of knowledge, skill
and labour to be made for the joint benefit of partners. While lectures are structured around achieving
the indicated outcomes, it is important for students to envision the common-law principles within its
broader context. Keeping in mind how the formation and governance of partnerships may impact upon
the socio-economic needs of South Africa to support growth and fiscal development.

Learning material

Business Law chapter 23

Learning objectives and notes

At the conclusion of this study unit, you should be able to demonstrate your knowledge and
understanding of partnerships through your ability to:

1. Define and distinguish a partnership as a business venture from a close corporation and a company
after completion of study units 2 and 3 (see also 24.01 and 24.13)
Introduction
A partnership is the coming together of two or more persons who conclude a partnership contract with
the aim of running a business for the purposes of making a profit for their joint benefit. All partners
should contribute money, property, services, skills or experience that will be at the disposal of the
partnership for the purposes of running business and all these should be subject to risk.

E.g. Thabo, James and Piet who are professional builders conclude a contract of partnership to build
contemporary houses in the Pretoria East. In the contract of partnership, Thabo undertakes to contribute
1 million and his brick laying expertise, James undertakes to contribute his expertise as a structural
designer and Piet undertakes to contribute his expertise as a general builder.

 In the partnership the three will make profit.

 For their joint benefit.
 They should all contribute something of value to be used in running the partnership business.
E.g. money, property such as tools, or expertise or labour.
 All the above will be subject to risk should the partnership fail.

Characteristics of a partnership
Formed by a contract:
o This means that partners should conclude a contract and all the general requirements of the
conclusion of the contract should be complied with.
o There are no formal legal requirements for registration of a partnership as it is required when
forming companies. E.g. when forming a company you will need the Notice of Incorporation,
Memorandum of Incorporation and the prescribed fee. When forming a partnership you do not
need all these.
o However, the Consumer Protection Act 68 of 2008 requires the registration of a business name
before a partnership can start operation or conducting business.
o The contract can be concluded orally, in writing or tacitly (implied without being directly stated
between parties).

Aim to make a profit

o The aim of a partnership is to make profit or any patrimonial gain (gain in the person’s financial
status).
o Without this there is no partnership.
Association of at least two persons
o A partnership is always the coming together of two or more people and in terms of the current
Companies Act there is no limit.
o 20 or more people can form a partnership.
o One person cannot form a partnership.

Not a juristic person

o A partnership is not a juristic or legal person, meaning that it is not regarded as separate and legally
independent person from the partners.
o It does not gain legal personality, upon formation.
o This means that in the eyes of the law it is not separate from the partners.
o As the partnership does not have a legal personality, the assets of the partnership are owned by
partners jointly.
o The partners also jointly liable for the partnership’s debts.
o They (partners) must also jointly enforce claims that are in favour of the partnership.
o However, the High court rule 14 and Magistrates’ courts rule 52 for the sake of convenience allow
partners sue in the name of the partnership and third parties to sue the partnership in its name.
- Example: Fast builders partnership is owed R 500 000 by Sam and Sam refuses to pay. The
partners can sue Sam in the name of the partnership. This means that in the court papers the
name Fast builders will appear not the names of partners.
OR
- Fast Builders partnership owes Power Tools a company that sells tools R 500 000. In case of a
dispute, Power Tools can sue the partnership in its name. This means that in the court papers
the name Fast builders will appear instead of the names of the partners.
o This does not make a partnership a separate legal person independent from partners.
- In the unfortunate case where the partnership is insolvent (liabilities exceed assets and unable
to pay its debts), the partnership’s estate will simultaneously be sequestrated with the estates of
the partners in the partnership but separately.
- This means that there will be two separate trustee’s accounts, for the partnership estate and the
estate of each partner.
- The rationale is for the creditors of the partnership to claim from the estate of the partnership
and if there is money left it can be proportionally shared with each partner’s estate.
- These provide examples or instances where partnerships are regarded as independent from their
partners for the sake of efficiency.
Partners bear risk of the adventure
o Since partnerships do not have separate legal personality, ordinary partners bear the risk of the
business.
o That is why in the event of insolvency of the partnership, all partners will be simultaneously
sequestrated and the remaining money from each partner’s estate will be transferred to the
partnership’s estate to pay its creditors.

Formation of partnerships
 Partnerships are formed by the conclusion of the partnership contract where two or more parties
have the intention to form a partnership, undertake to run the partnership for the purposes of
making profit, undertake to run the partnership for joint benefit and undertake to contribute
something of value to run the partnership business.
 The partnership contract should have all the essentialia which are characteristics that distinguish it
from other contracts.

Essentialia of the partnership contract

 Each partner must contribute something of value to the partnership’s estate and such must be
subject to risk e.g. money, tools, building, labour and skills. These will run the business.
 The common business must be carried for joint benefit of partners. Study on your own paragraphs
23.11 to 23.15 for the explanation of this essentialia.
 The partnership’s business should be operated for the purpose of making profit or any financial
gain.

Textbook:

Carrying-on of a common business for the joint benefit of all partners

This element pre-supposes a common business that is carried on for the benefit of all partners. The
business need not be continuous. It can be a single business transaction that is formed for the purpose
of making profit. Each partner must have an interest in the common business. A partner, when acting
on behalf of the partnership, therefore, does not act only as a representative of the other partners, but is
also involved as principal.

The partners have a common interest in the net profits and the distribution thereof, in return for the risk
borne by them.

Each partner need not share in all the profits, as long as each has the expectation to share in some of the
profits, for example, after another partner has received a specified minimum portion of the profits. The
ratio in which profits are to be divided can be determined in the partnership agreement. If not, the profits
are divided in proportion to the value of each partner’s contribution and if the proportion is not
determinable, in equal shares.

An agreement that one partner will not share in the profit (the so-called societas leonina), is contrary to
the very essence of partnership and is void at common law.
If the intention is that each party will receive his/her contemplated profit exclusively for his/her own
account, the parties are not partners. In this way, parties to so-called room-sharing agreements share
certain facilities like office space, equipment, accounting facilities, and so forth, but not profits and
there is no joint enterprise.

Intention of parties
→ The presence of all aforementioned essentialia above is prima facie (sufficient to conclude) proof
that partners concluded a partnership agreement.
→ However, they still have to have an intention to conclude a partnership.
→ If any of the aforementioned essentialia is not available then the agreement is not a partnership.

The general requirements of the partnership agreement:

➢ The parties must reach consensus/agreement
➢ The parties must have contractual capacity
➢ The contract and performance must be legally possible.
➢ The performance must be physically possible.
➢ Contractual formalities if any must be complied with.

Rights of partners
The contractual agreement creates a relationship between parties and this creates rights and duties
among each other.

Right to profit, remuneration, interests and indemnity

Partners are entitled to profit and where there is an agreement they are entitled to remuneration for
labour and interest on their capital. They are always indemnified (protected) against damages and
expenses incurred in the execution of their duties.

Control and related matters

Control
• All partners in the partnership are entitled to conclude management actions in transactions that are
within the scope of the partnership’s business except where there is an agreement to the contrary.
In other words, they are all equally in control of the partnership where the transactions are within
the scope of the partnership’s business.
- E.g. each partner has the authority to bind the partnership except where the partnership
agreement states that only Sam one of the partners has such authority. (On transactions that are
within the scope of the partnership)
• Disputes related to management are resolved by the majority rule and an aggrieved minority
partner has an option to leave the partnership.
Access to books
 Partners or their representatives who undertake not to misuse the confidential information can
inspect the books of the partnership unless they are excluded in terms of the agreement or waive
their right.
 They may demand that the books be kept at the place of business of the partnership.

Access to partnership’s assets

▪ Co-partners have access to the assets of the partnership for the purposes of promoting the
partnership’s business.
▪ No partner can deny other partners access to the assets of the partnership unless they consented.
▪ No partner can for personal use, take or dispose the partnerships assets.

Duties of partners
Since partnerships are formed by conclusion of a contract, each partner undertakes or commits to do
the following:
 To contribute something of value and if he fails then parties can institute an action known as
actio pro socio to claim specific performance promised by the partner in terms of the contract and
where dissolution of the partnership is appropriate specific performance will not be effected.
 To share in the losses as per the agreement and if there is no agreement in the proportion that
profits are shared. Some partners as per agreement can be excluded from sharing net losses.
However, general costs of running business and risk of business in case it fails (insolvent) are borne
by all parties.
 To exercise care
- Partners are expected to exercise the same care and skill that they will exercise in their own
affairs when representing the partnership.
- Where partnership suffers damage or loses profit due to the intentional (wilful) or negligence
(careless) actions of the partner, the partner will be held personally liable for the damage or loss
of profit. E.g. Builder negligently builds a wall of poor quality and the partnership loses profit.
- The test for negligence is the reasonable persons test.
- This means that a question will be asked as to how a reasonable person would have acted in the
position of the partner. If the actions of the partner deviate from those of the reasonable person,
then the partner will be held liable.
- Partners are not generally expected to exercise extra-ordinary skill unless they undertook to
contribute the skill in the business and they have to exercise the skill as they are reasonably
expected to do so.
 To maintain bonafide (good faith) which means to act honestly at all times.
- Generally since all partners are entitled to bind each other, they owe a fiduciary duty to one and
another. This means that they should act honestly when representing the partnership. They
should disclose information and avoid a conflict of interest.
- Partners must account and distribute all the profits made personally within the scope of the
partnership’s business. E.g. Attorneys in a partnership should disclose and distribute all profits
made personally within scope of partnership’s business to the partnership. Representing a client
in a bail hearing and making a profit of R 2000. This money should be distributed to the
partnership. If a partner fails to do that they allow their personal interests to conflict with the
partnership’s interests.
- Must disclose assets that are in their possession or any information that must be disclosed.
- Must not do anything that undermines or harms the partnership.
- A partner must not keep any profit that was made due to breach of good faith. Such profits must
be shared with other partners.

Litigation between partners

Actio pro socio
E.g. Sam and Victor are builders who have concluded a partnership contract to build houses in the
Pretoria East. Sam has undertaken to contribute R500 000 and labour and Victor has undertaken to
contribute labour including management of projects. Sam pays half of the money he undertook to pay
and refuses to pay the balance.

 Victor has the remedy in the form actio pro socio to enforce the terms of contract.
 In other words, Victor can in his own name as plaintiff in court can claim specific performance
from Sam which is payment of the other half of money.
 Actio pro socio can also be used to interdict (prevent Sam or Victor from abusing the assets of
the partnership).

Actio communi dividundo

Suppose Sam and Victor own the partnership’s car jointly (undivided share) and the partnership has
dissolved. Sam wants to keep the car by disregarding Victor’s interests as a joint owner of the car.

Victor can institute actio communi dividundo after the dissolution of the partnership for the court to
order the division of the jointly owned car.

Prescription relating to partnership’s debts is not completed until one year has lapsed after the
dissolution of contract.

Study paragraph 23:38 to 23:40 on your own.

Textbook:

When legal proceedings are instituted

During existence of partnership
The institution of the actio pro socio has, on various occasions, been allowed during the existence of
the partnership, for example, where damages and a proportionate share of a partnership debt, or a share
of the net profit, was claimed. The actio pro socio may be instituted without asking for dissolution of
the partnership if dissolution would not entail any advantage.

After dissolution of partnership

After dissolution, final accounts are drawn up. After this the partners may claim what is owing to them
in terms of such accounts. A former partner may not, after the appointment of a liquidator, usurp any
of the functions of the liquidator. Upon completion of liquidation the partnership relationship between
the parties is terminated and the actio pro socio and actio communi dividundo can no longer be
instituted.

Arbitration
A partnership may, in terms of an arbitration clause in the partnership agreement, or an arbitration
agreement, be bound to refer any dispute based on the partnership obligation to arbitration, rather than
to a court of law. Such a clause or agreement, therefore, excludes the actio pro socio.

Obligations between partners and third parties

❖ In some instances partners may represent the partnership in contracts with third parties. When they
do so, they act a principal and representative.
❖ As aforementioned, all partners have the authority to bind the partnership in transactions that fall
within the scope of the partnership’s business. E.g In a partnership that operates the business of car
wash, all partners can bind the partnership on transactions such as buying cleaning agents, hiring
space for business, buying tools for car wash but not buying a luxury car for other operational
matters (Ferarri).
❖ This is known as the principle of mutual mandate.
❖ However, when it comes to transactions that are outside the scope of the partnership, partners as
they will be bound by transactions concluded by a co-partner will have to grant authority expressly
in the partnership agreement.
❖ The principle of mutual mandate and the granting of authority to bind the partnership are naturalia
of the contract; therefore, they can be excluded or be varied between partners.
❖ In order for the third party to rely on mutual mandate he or she must be bona fide (act honestly),
which means he must not be aware that the partner does not have authority because the transaction
is excluded in partnership agreement.
❖ Partners can ratify the unauthorised contracts concluded by the partner.
❖ Partners can also be held liable due to estoppel (ostensible authority) where they created an
impression that the partner has authority whereas this is not the case. In other words, they will be
prevented from denying the authority of the co-partner if they created an impression that she has
authority.
❖ In other to bind the partnership not the partner personally in transactions with third parties, the
following must be present:
- The communications of the partner must indicate as such,
- The conduct of the parties must indicate as such.
- The knowledge of the third party must indicate as such.
- And other surrounding circumstances must indicate as such.
- Both parties must have intended to bind the partnership and the third party.
❖ The CPA provides that transactions on behalf of the partnership should be concluded in the name
of the partnership.
❖ The doctrine of undisclosed principal where the partner concluded the contract in his own name
grants the third party an option to hold the partner or the partnership liable.

Delictual and criminal cases

As a partnership is not a legal person it cannot commit a crime. However, in terms of the Criminal
Procedure Act, section 322 all partners can be guilty of an offence committed by one of the partners
when promoting the interests or business of the partnership unless they prove the following:
 They did not partake in the crime
 They could not prevent the crime or
 They were not members of the management committee or other committee that committed the
offence.

Partners as parties to a contract

 During the existence of the partnership, partners are joint creditors and debtors of third parties.
 Third parties can therefore institute actions against the partnership not individual partners.
 The parties can agree with third parties that they are jointly and severally liable for debts or one
partner’s liability is limited.
 However, they remain jointly and severally liable to partnership’s creditors when the partnership
is dissolved but remain co-creditors for debts owed to the partnership.
Litigation
 In litigation such as in actio pro socio, parties cannot institute actions in the name of the
partnership.
 However, in other actions where the partners sue or are sued by third parties then name of the firm
can be used. This is provided by the rules of court.
 The plaintiff is not required to name the partners, if she does then an error or omission is not a
defence.
 Execution of judgement (satisfaction/fulfilment of the judgment of the court) will first be against
the assets of the partnership and when they are finished, the assets of individual partners will then
be used to satisfy the judgment of the court.

Grounds for Dissolution of Partnership

Please study the explanation of the grounds of dissolution on your own on paragraph 23: 49 to 23:60.
 Agreement between partners
 Lapse or expiry of time and completion of business
 Change in membership
 Death
 Notice of retirement
 Retirement and admission of a new partner
 Order of court if the court deems it just and equitable for the partnership to dissolve.
 Breach of essential term of partnership agreement
 Irreparable breach of relationship of trust
 No prospect of profit
 Personal circumstances
 Miscellaneous (various) operation of law
 Sequestration of the partnership’s or private partner’s estate.

Agreement
The partnership may be terminated by an express or tacit agreement between the partners.

Effluxion of time and completion of business

If a partnership agreement was concluded for a specific period, the partnership automatically dissolves
upon expiry of that period. A partnership that was brought about for the completion of one specific
project ends as soon as the profits have been collected and distributed after final accounting.
Change in membership
General
Because a partnership is not a legal persona, but an association of persons that owes its very existence
to an agreement, it dissolves as soon as there is a change in its membership.

Death
The partnership is immediately dissolved upon the death of one of the partners.

Notice of retirement
If the partnership is constituted for an indefinite period of time, any partner may give notice of his/her
retirement to the other partners or to their representatives.

Retirement of partner or admission of new partner

Retirement of a partner or admission of a new one may take place only by agreement; this results in the
“old” partnership being dissolved and a “new” one coming into being.

Order of court
General
If a court deems it just and equitable, with reference to the interests of all the partners, and not only of
those who want dissolution, it may order that the partnership be dissolved.

Breach of essential term of partnership agreement

The contract may expressly provide that specific conduct, for instance, professional misconduct by a
partner in a professional practice, may be a ground for dissolution.

Irreparable breach of relationship of trust

Instances where partners can no longer co-operate because of continuous quarrels among themselves,
adultery between a partner and the husband/wife of another partner or gross and continuous negligence,
may justify dissolution. The applicant must prove irreparable breach.

No prospect of profit
This may be because of a lack of mutual trust and co-operation, or, for example, that mines worked by
the partners had become exhausted.

Personal circumstances
Circumstances such as prolonged illness, or a partner being declared mentally ill, could form the basis
for dissolution.

Miscellaneous instances of operation of law

Sequestration of the partnership estate, or the private estate of a partner, could also form the basis for
dissolution.
SU 2: Companies

The purpose of this unit is to use common law, indigenous knowledge, the Companies Act 71 of 2008
and practical business case studies to equip students with the necessary information relating to the
nature and formation of companies; the governance and management of companies; applicable
accountability and transparency requirements; rights, remedies and the enforcement of such rights and
remedies by affected persons; business rescue; winding up and the deregistration of companies.
Although lectures will be structured around achieving the indicated outcomes, emphasis will be placed
upon the transformation goals outlined in section 7 of the Companies Act that aims to give effect to
the Constitutional demands of South Africa.

After completing this unit, students must be able to discuss these themes in relation to the set goals
and within the South African socio-economic context by explaining, for example:

 How the simplified incorporation process aids entrepreneurship;

 How effective rescue and recovery procedures fosters wealth creation and sustainable
employment;

 How heightened corporate governance standards ensures fairness and benefit for all

stakeholders.

SU 2.1: Introduction to company law

Learning material

1. Business Law chapter 24

2. Section 7 of the Companies Act 71 of 2008

Learning objectives

At the conclusion of this study unit, you should be able to demonstrate your knowledge and
understanding of companies through your ability to:

1. Define a company, and name and explain the characteristics of this business structure;
2. Explain what is meant by legal personality;
3. Explain the difference between business entities with legal personality and those without legal
personality;
4. Name and explain the types of companies and the uses of each type;
5. Briefly discuss pre-incorporation contracts in terms of the common law and in terms of the
Companies Act of 2008;
6. Describe the procedure for incorporation and consider how this procedure adheres to Section
7(b)(ii) of the Companies Act;
7. Explain how the Companies Act facilitates the participation of individuals in the socio-economic
well-being of the nation;
8. Explain the concept of corporate social responsibility and how it resonates with the concept of
Ubuntu;
9. Apply the abovementioned principles/law to relevant but unfamiliar scenarios to solve practical
problems.
Introduction
 There are four main types of business vehicles that allow one to make profit and in some instances allow one
to achieve an objective that is aimed at the betterment of the society (non- profit companies)
 They are companies, partnerships, sole proprietorships, and close corporations (‘CC’).
 In this study unit we will deal with companies as business vehicles that allow one to make a profit.
 Companies are the coming together of entrepreneurs to form a company with the aim of making a profit or
to improve a certain aspect of the society.
 The main attraction or reason why entrepreneurs would start a company is because of the separate legal
personality that is endowed on companies upon incorporation.
 The separate legal personality entails that the company is legally viewed as a legal person distinct or separate
from its incorporators (creators or founders).
 This separate legal personality which is sometimes referred to as separate juristic personality means that
creators or founders who are known as shareholders stand to lose only what they have invested in the
company. Their private estates cannot be touched.
 E.g Sam and Lindi decide to form a company that will specialise in building houses. They name their
company SL (Pty) Ltd. They each invest R 1 million. In the unfortunate event that the company fails due to
lack of business or pandemic, they stand to lose only what they have invested in the company due to the
separate legal personality. Their personal estates are beyond the reach of the hands of the company’s
creditors.
 This is why entrepreneurs prefer to start companies as opposed to partnerships and sole proprietorship.
 The incorporation (establishment), functions, types of companies, governance and management, resolution
of problems/challenges and dissolution are regulated by the Companies Act 71 of 2008 (‘the Act’).
 Although there are challenges or problems with the Companies Act, it is nonetheless known for its simplicity
and flexibility.

What is a company and what are its characteristics?

▪ It is not easy to define a company. Section 1, of the Companies Act 71 of 2008 defines a company as a
juristic person that is incorporated (founded) in terms of the Companies Act, or the previous Act and
close corporations (‘CC’) that were registered in terms of the Close Corporations Act 69 of 1984 and
have been converted into companies.
▪ This means that Companies are separate legal persons that are incorporated (founded) in terms of the
Act or the previous Act and close corporations that have been converted into companies.
▪ This is not a helpful definition as it does not give us a clear picture as to what a company is. Let’s try
to come with a better definition.
▪ A company is a group of entrepreneurs who come together (accompany each other) to form a business
vehicle in the form of a company with the aim of making a profit and in some instances for the common
good or betterment of an aspect of the society (Non-profit company established with the aim of using
sports to reform the youth of the society).
▪ No new close corporations can be formed but those that exist can exist indefinitely.
Characteristics of the company
Legal personality
 Once a person or a group of entrepreneurs have complied with the requirements of registering a
company, the company is incorporated. This means it comes into existence.
 The Companies and Intellectual Property Commission (CIPC) will issue an incorporation certificate
that proves that the company is duly registered and has legally come into being (birthed).
 Once a company is registered as such and the certificate is issued it acquires the separate legal
personality (separate juristic personality) which means it is distinct or exists separate from its founders
or incorporators who are known as shareholders.
 Although it is not a natural person and need organs to represent it, in law it is viewed as a separate legal
person.
 As mentioned above, this attribute is the main reason why entrepreneurs prefer companies as their
business structure of choice.

Legal personality has several implications

Bearer of rights and duties
 Despite the fact that shareholders invest in a company, a company owns the assets of the company.
Shareholders do not have ownership rights to the assets of the company until it is dissolved and creditors
are paid, then that is when the remaining assets can be shared among shareholders.
 Profits belong to the company until they are declared as dividends.
 Creditors of the company have a claim against the estate of the company not the private estates of
shareholders. (This is due to the separate legal personality.)
 In some exceptional circumstances the latter implication can be disregarded and the company will not
be deemed to be a separate legal person due to the unconscionable abuse of the company (unacceptable
abuse) by those in control of the company. This will lead to personal liability of those who abused the
company.
 In some instances where the company’s business is run recklessly, gross negligently, with intent to
defraud or for fraudulent purposes those who did so will be held personality liable (section 22 and 77
of the Companies Act)
 In a form of a company known as personal liability company, current and past directors are together
with the company jointly and severally liable for the debts of the company. E.g. If the company pays,
directors should reimburse the company and should directors pay, the company should reimburse
directors.
Explanation of separate legal personality
 Companies as separate legal persons exist independently from their shareholders.
 Unlike partnerships they exist perpetually (indefinitely) regardless of changes in the shareholding. E.g
If Sam decides to sell his shares and leave the company, the company does not come to an end.
 The company is entitled and bound by the Bill of Rights in Constitution.
 Unlike in partnerships, shareholders in their capacity do not have the right represent companies.
 However, companies need organs to represent them. (natural persons who are known as the directors)

Other differences between companies and partnerships

• Unlike partnerships, companies can be formed by one person and non-profit companies can even exist
without members but must be founded by three persons.
• Unlike partnerships, although companies are mainly formed for profit making, they can also be formed
for non-profit purposes. E.g. to better a certain aspect of the society. (Partnerships are formed solely for
profit making)
• Unlike partnerships which are formed by agreement and without formal requirements, companies are
formed through incorporation (formal process and requirements prescribed by the Companies Act).

Piercing the corporate veil or disregarding the separate legal personality

 A company ceases to exist upon dissolution or deregistration.
 In some exceptional circumstances legislation and courts may disregard the separate legal
personality of the company in order to establish the real intention of the actions of those who
control companies.
- E.g for purposes of Criminal Procedure or purposes where those in control of companies have used the
company to commit crime or to evade tax. The separate legal personality will be disregarded or pierced
(torn apart) to see the real intentions of those in control of companies.
- E.g Sam uses his pharmaceutical company to smuggle drugs in the country. The Criminal Procedure will
disregard the separate legal personality of the company to go after Sam.
 Other instances are where Sam a shareholder and adirector abuses the company with aim of
defrauding people. Where he starts a pyramid scheme with the aim of defrauding innocent people.
The court will disregard the separate legal personality or pierce or tear apart the corporate veil to
allow the innocent people to go after Sam. (Innocent people will go after Sam as a shareholder and
a director despite the characteristic that creditors cannot go after the separate estates of
shareholders and directors but the company)
 In some instances separate legal personality will be disregarded where Sam as a shareholder and
director of the company has recklessly run or gross negligently run the company. Typical example
would be where Sam as a director allowed the company to conclude contracts knowing very well
that the company is insolvent (cannot pay its liabilities). The courts can disregard or pierce (tear
apart) the corporate veil to allow the creditors to go after Sam.
 However, courts should not rush to disregard the separate legal personality of the company. In
cases of abuse, the importance of separate legal personality should be balanced with the need to
disregard separate legal personality.

Types of companies
❖ There are two main types of companies, profit companies and non-profit companies.
❖ Profit companies (aim is to make profit) and non-profit companies (aim is not to make profit but
exist for a public benefit).

Profit companies
Under profit companies we find the following sub-types:

State owned company

 These are companies that owned by the State/government (National government or Municipality)
e.g Eskom SOC.
 Its name ends with SOC.

Private company
o These are companies that are best suited for smaller businesses and are not required to comply with
enhanced accountability requirements.
o Its financial statements are not required to be audited unless required because of its significance
economically or socially. E.g a mine that employs a substantial number of employees in a particular
community may be regarded as economically and socially significant.
o The distinguishing characteristic of this company is that its governing document known as the
Memorandum of Incorporation (‘MOI’) should prohibit the transfer of its shares to the public.
o Its name ends with (Pty) Ltd.
o Can have one director.
o Can be formed by one person.

Public company
▪ This is the direct opposite of the private company.
▪ Its name ends with Ltd e.g. Absa Bank Ltd or Vodacom Ltd.
▪ Its shares are transferrable to the public.
▪ Can be formed by one person but must have 3 directors or more.
▪ Its financial statements must be audited
▪ It must comply with enhanced accountability requirements.
▪ All the aforementioned requirements are applicable because the general public is affected by these
companies since its shares are available to the public. Their aim is to protect the public.
Personal Liability Company
 The MOI of provides that directors and companies are jointly and severally liable for the debts and
contractual liabilities of the company.
 Liabilities and debts incurred during the directors term of office as directors of companies.
 In some professions all directors may be required to be directors.
 This is to ensure that professionals in companies do not escape liabilities due to separate legal
personality.
 E.g Van Heerden and Mahlangu attorneys Inc.
 This is another form of a private company but its MOI makes it different from the conventional
private company.

Non-profit companies
→ Its name must end with NPC.
→ These are companies that are not incorporated for profit but for public benefit such as cultural
advancement or group interests. E.g. establishing a NPC to keep the youth away from the streets
through sports and arts and culture.
→ The assets of the company must be used to advance the objective of the company.
→ However, reasonable remuneration may be paid from the assets of the company for work done or
services performed for the company.
→ It may not have shareholders (members).
→ Upon dissolution of the company the assets should be transferred to a similar company or entity
pursuing a similar cause.
→ It must have three directors.
→ The aim of the latter is to safe guard the sensitive object of such companies.

Conversion of companies
Please read paragraph 24:27 on your own.

Textbook:

The Companies Act does not expressly provide for conversions between different types of companies.
Conversion of all profit companies, except a personal liability company, could be effected simply by
way of an amendment to the memorandum of incorporation [section 16(6)]. Conversion of a personal
liability company to another type of company is subject to the company giving at least ten business
days’ advance notice of the filing of the notice of amendment to any professional or industry regulatory
authority that has jurisdiction over the business activities carried on by the company. The same notice
must be given to all persons who, in their dealings with the company, may reasonably be considered to
have acted in reliance on the joint and several liability of any of the directors for the debts and liabilities
of the company or who may be adversely affected if the joint and several liability of any of the directors
for the debts and liabilities of the company is terminated as a consequence of the amendment to the
memorandum of incorporation [section 16(10)].
Incorporation of Companies
Pre-incorporation contract
Common law
 In common law it is impossible to represent a principal (company) that does not exist. (No principal
no agency).
 However, stipulation contract between two parties for the benefit of the third party (company once
it is incorporated). E.g. Sam leases premises from KK office parks for the benefit of the third party
(a company that is not yet incorporated). Upon incorporation the company can accept the benefit
or reject it.
 Cession of right under option contract is where e.g Jack offers Tim the lease of premises and Jack
is prohibited to revoke his offer to Tim for a certain time. Upon incorporation of the company, Tim
through cession transfers the rights from the option contract between him and Jack to the company.
The company becomes the offeree in the contract. In other words, the company becomes the party
in the lease contract. The company takes the place of Tim in the contract.
 Acting in one’s own name and delegation to the company when it is incorporated. This means
transferring rights and duties to the company.
 Nomination is e.g. Where Sam concludes a contract of lease with Jack and Jack has the right to
nominate a third party. Upon incorporation of the company, Jack nominates the company.
 The aim is to ensure that companies that are not yet incorporated do not miss out on contracts that
may be beneficial to them.
 Note the risks that the parties in the common law contract will assume in the event that companies
refuse to be party to such contracts or accept the rights and duties from such contracts.

Pre-incorporation contracts in terms of the Companies Act 71 of 2008

➢ For the sake of efficiency, the Companies Act 71 of 2008 (‘the Act’) has introduced the pre-
incorporation contract to prevent the situation where companies miss out on lucrative contracts
because they are not yet incorporated or are in the process of being incorporated.
➢ Section 21 of the Act provides that a person (promoter/founder) can conclude a written contract on
behalf the company that is not yet incorporated.
➢ The company’s board may completely, partially or conditionally ratify (accept and assume terms
of contract) the contract with 3 months after incorporation.
➢ If the company does nothing within 3 months after incorporation, then contract will be assumed to
have been ratified.
➢ Ratification means that the company is bound by the contract as if it was party to the contract from
the beginning when it was concluded.
➢ If the contract is rejected by the board or part of it or the company is not subsequently incorporated,
the promoter, company and its directors will be jointly and severally liable to the third party.
➢ Example of pre-incorporation contract:
- Sam and Zac are in the process of incorporating a company. On their way back from CIPC to
register the company, they see suitable premises in which they can run their company. The
premises will save a lot of money for the company and target market of the company is in close
proximity to the premises. They do not want their company to miss out on this great
opportunity.
o Sam and Zac can conclude a written pre-incorporation contract with the premises owner on behalf
of a company that is not yet incorporated.
o Upon incorporation of the company, directors should ratify the contract with 3 months.
o And their company will be bound as if it was a party to the pre-incorporation contract.

Incorporation procedure (how a company is born or comes into existence).

❖ A company is incorporated by creation and signing of an MOI (governing document of the
company) by one or more shareholders in private/personal liability and public companies, three
persons in a non-profit company and the state in the State-owned companies.
❖ The completion and filling of the Notice of Incorporation (‘NOI’) which serves to notify the CIPC
about the incorporation of the company.
❖ Payment of the prescribed fee.

All these are submitted at CIPC and if all requirements are complied with, the CIPC will register the
company, assign a registration number and issue the certificate of registration.

 Then the company will come into being from the date of its registration.
 From that date it becomes a separate legal person. (In law it is viewed as the separate legal
person distinct from its founders (shareholders).

How the Companies Act facilitates the participation of individuals in the socio-economic well-being of
the nation
Section 7 of the Companies Act 71 of 2008 provides that the purpose of the Act is to promote:
 Compliance with the Bill rights.
 To promote the development of the economy through efficient, flexible, transparent and simple
regulation of companies.
 To promote the creation and regulation of corporate rescue mechanism for financially distressed
companies in order to save jobs and the economy of the country.
 To promote efficient regulation of the governance of all aspects companies.
 To re-establish the role of companies in the development the society or the public.
 To promote transparency in all aspects of governance in companies.
 To promote the interests of all the stakeholders.
 To promote innovation and investment in companies.
 To balance the rights and obligations of shareholders and directors.
All these aim to ensure that potential entrepreneurs can easily access companies as the vehicle to run
businesses and thereby develop the economy of the country.

The concept of corporate social responsibility and how it resonates with the concept of Ubuntu
 Section 72(4) of the Companies Act 71 of 2008 provides for the establishment of social and ethics
committee.
 The minister can prescribe for certain companies to appoint the committee.
 The purpose of the committee is to ensure that companies not only focus on generating profits but
are also responsible citizens in the country.
 Although companies aim to make profits, they should also strive to improve the lives of the people
especially those of the community where it operates. E.g. Building sports facilities in areas where
it operates or a mine that provide bursaries for the youth of the community
 They should also strive to be ethical when conducting business from business transactions to
environmental ethics. E.g. A mine that ensures the preservation of the environment or takes care
of the water where it operates.
 This resonates well with the concept of Ubuntu which means humanness (I am because you are).
 This allows companies to be because of the community where it operates.
 The community also flourishes because of the contribution of the company to the betterment of the
community and by taking care of the environment for the benefit of all in the community.
SU 2.2: The memorandum of incorporation

Learning material

Business Law chapter 25

Learning objectives

At the conclusion of this study unit, you should be able to demonstrate your knowledge and
understanding of companies through your ability to:

1. Briefly discuss the functions of the Memorandum of Incorporation (“MOI”);

2. Explain constructive notice, and discuss whether it applies under the Companies Act of 2008;
3. Define and discuss the legal status of the MOI, shareholders agreements and rules;
4. Explain alterable and unalterable provisions (also relevant for upcoming units);
5. Briefly discuss the contents of the MOI and the amendment thereof;
6. Explain what is meant by the “company’s capacity” and discuss how capacity may be limited;
7. Discuss representation and authority;
8. Explain the Turquand rule;
9. Distinguish between capacity, representation and authority;
10. Apply the abovementioned principles/law to relevant but unfamiliar scenarios to solve practical
problems.

Introduction
 Unlike the previous Companies Act, the current Companies Act 71 of 2008 (‘the Act’) which
regulates companies in South Africa requires one document as the constitutive document of the
company.
 This document is known as the Memorandum of Incorporation (‘MOI’)
 This is the governing document in the company and it regulates relations within a specific company
and with third parties.
 However, the MOI must be consistent with the Act as the primary source of law that regulates
companies.
 Directors may also create rules that are necessary for the running of the company.
 Shareholders may also have agreements that will regulate relations within companies.
 The rules created by directors and shareholders’ agreements must also be consistent with the Act.
 This means that the rules and regulations of the Act as the primary source of company law must
be complied with and directors’ rules and shareholders’ agreements will provide rules that are
company specific and such rules must be consistent with the Act.
Doctrine of constructive notice
 In the past before the coming into effect of the current Act, third parties dealing or concluding
contracts with the company were required to known the contents of the constitutive documents of
the company that were filed at the companies’ Registrar and accessible at the company’s office.
 The documents contained matters that were important in the management of companies e.g.
whether the person who concludes contracts on behalf of the company has authority to do so.
 This is known as the doctrine of constructive notice.
 It has been partly abolished in the current Act.
 Let us explain how it has been partly abolished.
→ Some companies MOI’s contain special conditions on the capacity of the company and authority of those
who are representing companies and restrictions on the amendment of such conditions in the MOI.
→ The conditions should be complied with before the company can conclude contracts.
→ E.g where the MOI of the company provides that before the company can be bound in contracts that
exceed R200 000, the general meeting should provide authority to the board to conclude such as contract.
→ The company should in its Notice of Incorporation draw the attention of third parties to this rule or
provision.
→ This is known as a ring-fenced company and its name must have the abbreviation (‘RF’).
→ Third parties dealing with this company will be deemed to have knowledge of the contents of the MOI
of the company as it filed at the Companies and Intellectual Property Commission (‘CIPC’).
→ This means that third parties will be deemed to know about the condition as the Notice of incorporation
has drawn their attention to the condition.
→ This how the doctrine of constructive notice is partially applicable. (It is only applicable in the
exceptional circumstances provided above).

Legal status of the MOI and the rules

The MOI and the rules of the board are binding:
▪ Between the company and each shareholder.
▪ Between shareholders
▪ Between the company and each directors
▪ Between the company and prescribed officers
▪ Between the company and any member of the committee or an audit committee.
▪ This means that the MOI and the rules of the board regulate the aforementioned relations in the
company and all the mentioned parties should adhere to the provisions of the MOI and the rules.
▪ Note that the MOI and rules should be consistent with the Act otherwise they will be void to
the extent of their inconsistency.
Shareholders’ agreements
Shareholders may also agree on certain matters and such agreements will regulate relations within them
in the company. These agreements should be consistent with Act and the MOI and if not they will be
void to the extent of their inconsistency.

Alterable and Unalterable provisions of the Companies Act 71 of 2008

Alterable rules (can be changed)

• Some provisions of the Act can be changed (altered) to suit a specific company.
- E.g. Section 44(2) of the Act provides the board with authority to authorise financial assistance
for the purchase of the company’s shares.
• However, each company can decide in its own MOI not to allow financial assistance for the
purchase of its shares.
• This means that this provision by the Act can be altered (CHANGED) by companies in their MOI
suit the specific needs of the company.

Unalterable rules (cannot be changed)

➢ Some provisions of the Act cannot be changed in the MOI of the company to suit the specific needs
of the company. In most cases these are rules that are aimed at protecting companies and other
stakeholders in companies. In other words, they are imperative in the running of companies.
- e.g Section 76(3)(a) of the Act provides that directors of the company when representing the
company must exercise their powers and perform their functions
 in good faith and for proper purpose
 in the best interests of the company
 with the degree of care, skill and diligence…
➢ This provision cannot be changed as it is imperative in ensuring that directors when acting in their
capacity as the control minds of companies comply with the prescribed standards of conduct.
➢ Unalterable provisions can only be changed in the MOI if it provides a more rigorous or stricter
provision.
➢ When engaging the Act for the purposes of searching for alterable and unalterable provisions, look
at the language carefully. The word ‘must’ indicate that the provision cannot be changed and words
such ‘except to the extent that the MOI provides otherwise’ indicate that the MOI may change the
provision.
Memorandum of Incorporation
 The MOI is the constitutive document of the company and it is required when registering a
company.
 It regulates the rights, duties and responsibilities of shareholders, directors and other persons in
the company.
 It is the governing document in the company.
 It must be consistent with the Act.
 If not, it is void to the extent of its inconsistency.
 As aforementioned, it cannot change the unalterable provisions of the Act unless it provides a
higher standard.
 This means that the MOI can only change the duties of directors only of it requires stricter
duties than those provided in the Act.

Amendment of the MOI

Since the MOI is an imperative governing document in the company, it requires a rigorous process for
amendment.

 The board of director or shareholders holding an aggregate of 10% or more of the shares in the
company can propose an amendment.
 The amendment will require the support of 75% of the voting rights of shareholders present in a
meeting before it can be effected.
 This is known as the special resolution.
 The Notice of amendment must be filed at the CIPC and this must be accompanied by the prescribe
fee.
 The date amendment will be the later date between the acceptance of filing of amendment by the
CIPC or date specified in the Notice of amendment.

For paragraph 25:10 please refer to the discussion of the doctrine of constructive notice.

Textbook:

The memorandum of incorporation may include any “restrictive conditions applicable to the company”
and also a requirement for the amendment of any such conditions [section 15(2)(b)] and can furthermore
prohibit the amendment of any particular provision of the memorandum of incorporation [section
15(2)(c)]. In case of the latter, the notice of incorporation must clearly point this out and also indicate
the location of the prohibition in the memorandum of incorporation [section 13(3)]. In such an instance
the name of the company must have “(RF)” immediately following its name [section 11(3)(b)].
Company’s capacity
 In the past companies had the capacity to conclude contracts that were provided for in their objects clause.
E.g If a company was in the catering business, the object clause in its governing documents would provide
that it could only conclude contracts that were in line with catering. This meant that such a company could
not purchase an expensive luxury sports car.
 This was known as the doctrine of ultra vires which means transactions that are outside the scope of the
company.
 Such transactions were void.
 This was unfair to the third parties who contracted with the company.
 Section 19 and 20 of the Current Act remedied the injustices presented by ultra vires doctrine.
- Section 19 provides that a company has all the legal capacity and powers of a natural person except to the
extent that the company cannot exercise such powers or cannot have such capacity or the MOI provides
otherwise. E.g Companies cannot get married.
- However, section 20 provides an imperative provision by providing that in instances where the MOI of the
company prohibits or restricts any actions by the company or directors of the company, that action is
nonetheless valid between the company and third parties. E.g Where the MOI of the company that is in the
catering business provides that the company can only conclude contracts that are in line with catering and Sam
a director who is authorised to conclude contracts for the company purchases a yatch for the company from a
third party.
- Section 20 provides that the contract is valid as long it is not against the Act.
- Section 20 provides that such contracts are only invalid between company and shareholders, prescribed
officers and director. This means that the company can use the fact that the contract is prohibited to hold the
director personally liable for damages.
- Section 20 provides that other organs of the company and other stakeholders such as trade unions can apply
to court for an order to prevent the company or the director from concluding a contract that is prohibited in the
MOI.
- Section 20 also provides that the organs of the company can apply to court for an order to prevent the company
or the director from concluding the contract that is prohibited in the MOI but this must be without prejudice
to the damages of the third party who acted in good faith and had no knowledge of the prohibition.
- Section 20 provides that shareholders may with a special resolution ratify (accept) a contract that is prohibited
in the MOI.
- Section 20 provides that each shareholder has a claim of damages against the director who concluded a contract
that is prohibited in the MOI.
 Here section 19 and 20 do away with ultra vires and allow the third party to hold the company liable for
contracts that are prohibited in the MOI.
 The latter ensures fairness to the third party.
 However, the company through its organs is armed with the right to apply for an interdict to prevent the
director from concluding such a contract.
 Each shareholder is armed with the right claim damages from a director who concluded a contract that is
prohibited in the MOI.
 The latter serves as an adequate deterrence (discouragement) for directors to breach the MOI.
Representation
 In terms of section 66 of the Act the board of the company has the power to control and bind the
company. This means that the control mind of company is its board.
 The board is the group of directors acting together. E.g. In a public company there must be 3 or
more directors and they are referred to as the board of directors.
 Companies can also be bound by agents of the company who are granted actual authority which is
express authority or implied.
 Agents can also bind companies based on ostensible authority where the company created an
impression that the agent has authority.
 Express authority is granted to an agent in the MOI or by a board resolution.
 Agents must accept delegation of powers.
 Implied authority is when an officer in the company performs the functions of the office.
 The MOI may provide that one of the directors will conclude contracst on behalf of the company
or the board may through the board resolution appoint one director to conclude contracts on behalf
of the company.

Instances of ostensible authority

E.g. The MOI of the company provides that Sam is the only director who has the authority to conclude
contracts on behalf of the company. For the past 5 years the company has allowed Ronnie another
director to conclude contracts and the board of the company has honoured those contracts despite the
fact that Ronnie lacked authority. In the year 2021, the board refuses to pay one of the contracts
concluded by Ronnie with the third party. Is there recourse for the third party?

 Yes, the company has granted Ronnie an ostensible authority, thus estoppel is applicable to prevent
the company from relying on the truth because it created the impression that Ronnie has authority.
- The company must have intentionally or negligently misrepresented to the third party.
- The misrepresentation must be serious enough to reasonably mislead the third party.
- The third party must have been lead to act because of the misrepresentation.
- The third party must have suffered damages due to acting based on misrepresentation.

Ratification
The shareholders of a company may ratify any action by a company that is inconsistent with a limit,
restriction or qualification on the authority of the directors to perform an act on behalf of the company
imposed by the company’s memorandum of incorporation by special resolution [section 20(2)].
Ratification will only be effective in respect of acts that are not in contravention of the Companies Act
[section 20(3)].
Turquand rule
Reason for establishment of the Turquand rule:

The authority of company representatives is often dependent upon compliance with an internal
requirement, for instance the prior approval by the general meeting or the directors or the delegation of
certain powers. This state of affairs could have the effect that unreasonable and impossible demands be
made upon third parties who do not have access to internal management decisions. In order to remedy
this unsatisfactory situation, the British courts formulated the Turquand rule [Royal British Bank v
Turquand [1843] 60 All ER 435]. In terms of this rule an outsider who contracts with the company in
good faith is entitled to assume that internal requirements have been complied with and he is not
expected to make any further inquiries. The company will thus be bound even if an internal requirement
has not been complied with or an internal irregularity has occurred, resulting in the representative’s
authority being legally defective.

Common law and Statutory Turquand rule

Common law

In some companies, authority to bind companies is dependent on internal management requirements or

indoor management requirements. This places a burden on the shoulders of the third parties who want
to contract with the company to inquire as to whether the internal requirement was complied with. This
is unfair to third parties concluding contracts with companies as they have to spend money to find out
whether internal requirements have been complied with.

Let’s use an example to explain:

The board of directors of Yim Furnitures (Pty) Ltd has authorised Tim the managing director to
conclude contracts on behalf of the company. However, where the contract exceeds R 100 000, the
board must hold a meeting and grant authority to Tim. Tim concludes a contract that exceeds R100 000
on behalf of the company with Zweli logistics CC for Zweli logistics to deliver the company’s furniture
in Durban. Zweli logistics delivers on its undertaking and claims the money for the service rendered to
the company. The board claims that Tim does not have the authority because the meeting of the board
did not grant him authority as the contract exceeds R100 000. The board refuses to pay Zweli’s logistics
CC. Is this fair to Zweli logistics?

Obviously not as it is difficult for Zweli logistics to know whether or not the internal requirement was
complied with.

Turquand rule comes in to ensure that there is fairness to Zweli.

Common law Turquand provides that:

 A third party (Zweli logistics CC) acting in good faith when concluding a contract with the
company (Yim furnitures),
 Can assume that the internal requirement has been complied with in the company (the meeting of
the board was held and authority was granted to Tim)
 Yim Furnitures will be bound even though Tim did not have authority.
 Zweli logistics should not make further inquiries.
 Good faith means that Zweli logistics should not have been aware that the meeting did not take
place and Tim did not have authority. If Zweli logistics knew, then common law Turquand is not
available as there is lack of good faith (honesty) from Zweli logistics.
 And Turquand is available only when the third party contracted with the person who actually has
general authority to bind the company. E.g The board, Managing director with authority or officer
of the company.
 In instances where people pretend to be the board, or a person pretended to be the managing
director or officer of the company, Turquand rule will not be available. The person representing
the company must like Tim have actual general authority to represent the company.

Statutory Turquand rule (please refer to the same example above)

Section 20(7) of the Act provides:

 That Zweli logistics CC acting in good faith when contracting with the Yim Furnitures,
 Is entitled to presume that all internal requirements (indoor management rules) in terms of the Act,
MOI or rules of the company (Yim furnitures) have been complied with. (The meeting took place
and Tim was granted authority to conclude a contract that exceeds R 100 000)
 Zweli logistics cannot presume if they knew or ought to have reasonably known that the meeting
did not take place and Tim did not have authority.

The common law and statutory Turquand rule are applicable side by side. The plaintiff can choose either
one.
SU 2.3: Capital

Learning material

Business Law chapter 26

Learning objectives

At the conclusion of this study unit, you should be able to demonstrate your knowledge and
understanding of companies through your ability to:

1. Define capital;
2. Briefly explain how a company may raise/obtain capital;
3. Describe share capital;
4. Define shares and distinguish between classes of shares;
5. Explain the solvency and liquidity test;
6. Discuss company distributions;
7. Discuss the acquisition by a company of its own shares;
8. Discuss financial assistance and how this transaction facilitates economic growth and
empowerment;
9. Discuss accounting practice for a company;
10. Apply the abovementioned principles/law to relevant but unfamiliar scenarios to solve practical
problems.

Introduction
Definition of a capital:

❖ Companies have various ways of raising funds that are used to achieve their objectives:
 Investment of assets by founding shareholders. E.g Sam and Tim decide to incorporate a company and
each invests 1 million towards the incorporation of the company.
 The issuing (selling) of shares to existing and new shareholders.
 The profits made from rendering services or products that the company is incorporated to render. E.g
profit made by a logistics company by rendering services to the public.
 Reserves or savings saved in the company’s bank account.
❖ The totality of all the aforementioned is known as the CAPITAL of the company. This is the money
that is used to achieve the objectives of the company.
❖ This money is extremely important in the life of the company, thus the Companies Act 71 of 2008
(‘the Act’) provides stringent rules to safeguard this money.
❖ This money is available to the board to run the company but must be used with with prudence. The
provisions of the Act serve the purpose of ensuring that the board use this money carefully.
❖ This unit deals with the provisions that regulate the use of the CAPITAL with utmost care for the
sake of the financial well-being of the company.
Share capital
 Let’s explain the common method of raising funds in the company.
 When the company is incorporated shareholders will have to complete the MOI.
 In the MOI shareholders will provide two types of share capitals.
 The authorised share capital and issued share capital. The MOI will also comprise of different
classes of shares with rights and limitations of those shares.

Authorised share capital

 There is nothing magical about the term, it simply refers to the classes of shares and the number of
shares that the company is authorised or allowed to issue (sell) in order to raise capital/money to
achieve its objectives.
 E.g Silver Bank Ltd is authorised to issue 5000 shares and the company will issue 1 share for R
1000
 This means that the company has the authorised share capital of R 5, 000 000.
 This is not real money; it is just the amount of money that the company can be able raise through
the issuing of shares.

Issued share capital

Let’s use an example.
→ Let’s say 3 months after incorporation (registration of the company), Silver Bank Ltd has issued
(sold) 2000 shares for R 1000 each to new shareholders.
→ This means that the company has made R 2, 000, 000 so far.
→ This is issued share capital.
→ Thus, issued share capital is the amount of money that the company has collected or made through
the sale of shares so far.
→ This means that the company has R 2, 000, 000 million in the Bank.
→ Unlike authorised share capital, issued share capital is actual money made by the company to
achieve its objectives.

Shares
What is a share?

A share is a unit that represents a personal right of the shareholder to share in the profits of the company
and to share in the net assets after the winding up of the company. (Winding up is when the company
is dissolved and assets of the company are collected, used to pay the company’s creditors and and the
reminder of the assets are shared among the shareholders)
 This unit entitles the shareholder to also enjoy rights such as participation in meetings of the
company, voting on different resolutions or decisions of the company and other rights in terms of
the Act or the MOI.
 Shares do not entitle the shareholder any form of ownership over the assets of the company.
 Assets of the company are owned by the company (Separate legal personality).
 Shares are movables as they can be transferred from one shareholder to another in terms of the Act.
 In the past they needed to have a par value when authorised. E.g The MOI was required to have
words like: R 500 per share, which means each share has the value of R500.
 In terms of the current Act shares must not have par value.
 The board can determine the value as and when the company intends to issue shares.
 The MOI can just provide that the company is authorised to issue 5000 shares.

Classes of shares
 The MOI of the company may provide for classes of shares and the rights and limitations of those
shares. E.g Preference shares class A whose shareholders are entitled to be paid dividends before
all other shareholders in the company and they are not allowed to vote in the company’s meetings
except where a resolution alters their rights.
 The MOI can also have unclassified shares.
 Classes of shares can also be without rights and limitations of the shares.
 These are authorised shares.
 For the sake of the need to raise funds, a company may need to make changes to the authorised
shares, classes of shares, rights and limitations of shares and classification of unclassified rights.
 Changes to the above can be made by the board of directors provided the MOI provides such
powers to the board or through the amendment of the MOI by a special resolution. The resolution
and the notice of amendment must be filed at Companies and Intellectual Property Commission.

Different classes of shares

Ordinary shares
 These are common shares
 Their holders are entitled to vote in meetings, they are entitled to share in dividends, they are
usually not entitled to fixed dividends and they usually have the right to share in the remainder of
assets during winding up of the company. (In some instances they can be entitled to fixed
dividends)
 These shares are usually subscribed for by risk takers and dividends are usually not fixed but
depended on how much the company make in a particular financial year. E.g If the company makes
more money in a particular year, they stand to receive more dividends and if a company makes a
loss they stand to receive less or no dividends at all.
Preference shares
▪ These shares are known as preference shares because their holders are preferred when it comes to
payment of dividends provided the dividends are declared in a particular financial year.
▪ The dividends are fixed e.g. they will receive R 5000 dividends per share they hold.
▪ Note that the there is nothing stopping the terms of preference shares from applying to ordinary
shares.
▪ It depends on different companies.
▪ These are general principles.

Participating preference shares:

 Over and above the right to be paid first their fixed dividends before other shareholders, the holders
of these shares are entitled to participate in the sharing of profits with ordinary shareholders if there
is a residue or remaining profits.
 This is after they have received their fixed dividend.
 They will participate in the remaining income after the ordinary shareholders have been paid.

Redeemable preference shares:

The holders of the shares enjoy preference in terms of dividends. However, the term is that the company
if it is desirable may buy back (redeem) its shares from the holders of these shares.

Term/Period shares
These are preference shares that are issued for a specific term, when the term expires; the company may
buy back the shares or convert them into some class.

Cumulative preference shares

o The MOI of the company may provide for ‘arrear’ payment of dividends if the dividends were not
declared and issued in the previous year. In other words, the shareholders will receive cumulative
dividends.
o In terms of common law the presumption is that the holders of these shares are entitled to arrear
payment of dividends.
o However, this depends on the MOI or the resolution that created the cumulative shares.
o They will also enjoy preference over holders of other shares in the dividends of the subsequent
year if dividends of the previous year were not declared.
Variation of class rights
➔ The rights of shares in the MOI can only be amended by a special resolution of shareholders (75%
votes in favour of the amendment).
➔ Where the amendment materially changes the rights of shareholders E.g. where it limits the rights
of shareholders to their detriment, such shareholders have the right to use a remedy known as the
dissenting shareholders’ appraisal right in terms of section 164 of the Act.
➔ Resolutions of amendments of MOI’s where rights of shares are materially changed are likely to
negatively affect minority shareholders.
➔ In terms of this section they have to notify the company that they intend to oppose the proposed
resolution.
➔ And they must actually vote against or oppose the resolution in the meeting.
➔ Subject to other procedural requirements provided by section 164, the company will ultimately be
required to purchase the shares of the aggrieved shareholders at a fair value.
➔ This provides an escape or protection for aggrieved shareholders.

Raising capital
(Just read this paragraph in the textbook)

Textbook:

A company obtains capital by raising loans, including the issue of debentures, or by the issue of shares
either for cash or other assets. The memorandum of incorporation of a private company must prohibit
it from offering any of its shares to the public [sections 1 and 8(2)(b)] and a public company is entitled
to make an offer of unlisted securities to the public only if the offer is accompanied by a duly registered
prospectus that satisfies the requirements of section 100 [section 99(3)(b)(ii)]. In the case of listed
securities, an initial public offering (IPO) must be accompanied by a registered prospectus [section
99(2)] and comply with the requirements of the relevant exchange [section 100(1)]. Public offers of
listed securities that are not initial public offerings need only be in accordance with the requirements of
the relevant exchange [section 99(3)(a)(i)]. The aim of the requirements in respect of a prospectus is to
provide the public with adequate information to enable them to decide whether or not to invest in that
type of share.

 Companies may raise capital by accessing loans from Banks or from individuals (Debenture:
document that is issued by a company acknowledging that it owes Sam who provided a loan to the
company, this document serves as evidence that the company owes Sam a sum of money).
 Rendering services or providing products
 Issuing of shares
 Private companies cannot issue shares to the public.
 Public companies can issue shares to the public.
 They can issue shares that are not listed in the JSE or can issue shares that are listed in the JSE.
(Issued through JSE)
 Public companies shares which are not listed (not issued through the JSE) must be issued together
with a document known as the prospectus.
 A prospectus contains comprehensive information about the finances of the company and other
information about the company that will adequately inform potential investors to make informed
decisions whether they would like to invest in the company or not.
 Initial or first offer of shares to the public needs to be accompanied by the prospectus.
 Shares that are listed in the JSE should be issued in terms of the requirements of the JSE and no
prospectus is required.

Solvency and Liquidity test

• Before a company can use or transfer its money or assets to promote the objectives of the company
or transfer its money to anyone e.g. to provide financial assistance to employees of the company
to purchase the shares of the company for the sake of employee empowerment.
• The company MUST comply with an EXTREMELY important test of company law which is
known as the solvency and liquidity test in terms of section 4 of the Act.
• The test entails that:
- The assets of the company when fairly valued must be equal or exceed the liabilities of the
company (Solvency).
- The company must be able to pay its liabilities that fall due in the ordinary course business of
the company in the next 12 months after test is considered (Liquidity)

IF THIS IS NOT COMPLIED WITH, THE COMPANY CANNOT TRANFER OR USE ITS MONEY OR ASSETS.

Let’s look at specific circumstances where this test should be applied:

Distribution in terms of section 46 of the Act:

What is distribution?

Distribution includes:
→ Payment of dividends to shareholders.
→ In a company where the company usually issues shares to shareholders instead of dividends and
the company decides to pay money instead of providing shares. (capitalisation shares/shares used
to raise capital)
→ Company repurchase its shares.
→ Company gets into debt for the benefit of the shareholder
→ Company forgives a debt owed to it by its shareholders or another person in the company or group
of companies.
The company can only make a distribution if it is only:
 In terms of an existing obligation (owes dividends) OR
 In terms of order of court (court gives a verdict that the company should make a distribution
 Or where the board of directors authorise such a distribution.
- It must reasonably appear that the company will comply with solvency and liquidity test.
- The board must take a resolution confirming that it has applied the solvency and liquidity test
and reasonably confirm that the company will comply with the test after distribution.
- Distribution must be effected within 120 after the application of the solvency and liquidity test.
- A director who is present at a meeting but fails to vote against the resolution where the company
will not comply with the test will be held personally liable for damages to the company in terms
of section 77.
- In other words, a director will be held liable for causing damage to the company by failing to
vote against a distribution that did not comply with section 46 and solvency and liquidity test.
- From the provision one can deduct that the decision to issue distribution in accordance with
requirements section 46 should be made ‘reasonably’. It seems the standard is what a reasonable
person would have done in the same circumstances when applying the requirements of section
46.

Acquisition of shares
▪ The company may repurchase its shares in terms of section 48 of the Act.
▪ The same requirements of section 46 (distribution) should be applied.
▪ The repurchase of shares is regarded as a distribution as it entails transfer of company’s money to
the shareholders.
▪ The requirements particularly solvency and liquidity test are aimed at protecting the company’s
finances or capital for sake wealth preservation of shareholders, protecting interests of other
stakeholders and the development of the economy.
▪ Financially healthy companies can promote the economic development of the country.
▪ Directors who are present at a meeting and fail to vote against the resolution that does not comply
with section 46 and 48 will be liable for the incurred by the company in terms of section 77.
▪ A subsidiary of another company is a company that is controlled by another company e.g Where
City Light (Ltd) controls 51% of shares or more at Venon Ltd. Venon Ltd is a subsidiary of City
Light Ltd and City Light is the holding of Venon.
▪ Venon Ltd can only acquire not more than 10% shares of any class of shares at City Light Ltd.
▪ Such shares do not entitle Venon Ltd any voting rights.
Financial assistance in terms of section 44 of the Act
o The board may if the MOI allows, authorise financial assistance by way of a loan, guarantee, or
provision of security to any person for the purchase of the company’s shares or related company.
o Financial assistance does not include circumstances where the company’s business is to provide
financial assistance. E.g. Absa Bank Ltd providing loans in the ordinary course of business.
o The financial assistance must be in line with employee share scheme or in terms of a special
resolution adopted by shareholders within the previous 2 years wherein they resolved that financial
assistance will be provided to a particular person or a group of people.
o The board must ensure and confirm that the company will comply with solvency and liquidity test
after the financial assistance is provided
o And the proposed financial assistance will be provided under terms that are fair and reasonable to
the company.
o This section enables companies to assist employees or other stakeholders to purchase shares in the
company.
o This will empower them economically and consequently promote economic development of the
country
o On the other hand the requirements provided by section 44 are aimed at safeguarding the capital
of the company.

Accounting practices
 Companies are required to provide accounting records in one official language in its registered
office in order to comply with the Act.
 The company must prepare its annual financial statement within 6 months after the end of the
financial year.
 In public companies annual financial statements must be audited.
 The latter must include the director’s report on the financial and business affairs of the company
for shareholders to be informed about the state of the company.
 The annual financial statements must be approved and signed by the authorised director before
being presented to the shareholders.

Auditor
 As aforementioned, public company’s financial statements must be audited.
 Annual financial statements of certain profit companies and non-profit companies must also be
audited e.g. financial statements of a private company if it is in the public interest to do so
considering the economic and social significance of the company.
 A typical example would be where a private company employs a large number of people in the
community.
 The auditor must be appointed upon the registration of the company and each year at the annual
general meeting.
 The auditor must be registered in terms of the relevant legislation.
 The auditor must be acceptable to the audit committee.
 The auditor must be independent from the company.
 The aim of this is to ensure that the books of companies are examined to determine whether they
represent the actual financial state of the companies.
SU 2.4: Organs, shareholders and officers

Learning material

Business Law chapter 27

Learning objectives

At the conclusion of this study unit, you should be able to demonstrate your knowledge and
understanding of companies through your ability to:
1. Explain the various organs of a company;
2. Define a ‘shareholder’;
3. Discuss certificated and uncertificated securities as well as the securities register;
4. Explain how securities are transferred;
5. Explain the statutory remedies for unlawful conduct by shareholders;
6. Describe the roles of the organs and officers of a company;
7. Briefly discuss the meetings of shareholders and how resolutions are passed;
8. Briefly discuss directors and the standards applicable to directors’ conduct;
9. Apply the abovementioned principles/law to relevant but unfamiliar scenarios to solve practical
problems.

Various organs of a company

 As provided in the previous units, a company is a separate legal person. In other words, a company
is legally viewed as a legal or juristic person. Since it is not a natural person, it requires persons
with minds, hands and arms to represent it in the commercial world e.g. in concluding contracts or
bidding for tenders.
 The natural persons who represent a company in the commercial world are directors and natural
persons who incorporate (start) companies and invest in companies are known as shareholders.
 Shareholders appoint directors to control companies on their behalf.
 Directors and shareholders are known as organs of the company.

Shareholders
 A shareholder is a person who holds a share or shares issued by a company and who is registered as
such in the certificated and uncertificated shares register of the company.
 Certificated shares are shares that evidenced by a certificate and uncertificated shares are shares that
are not evidenced by a certificate.
 A share certificate will provide the name of the company, name of the shareholder, number and class
of shares held by the shareholder and restriction on the shares.
 Note the people who can be shareholders and note that companies or juristic persons can be shareholders
in other companies.
 E.g. Timo (Pty) Ltd can hold shares and Beat Bakers (Pty) Ltd.
 Note how a shareholder will cease to be shareholder in a company.
Certificated and uncertificated securities as well as the securities register
❖ Please note that term securities mean all financial instruments in a company.
❖ For the purposes of this course, securities mean shares.
❖ Certificated shares are shares that are evidenced by a certificate and uncertificated shares are shares
that are not evidenced by a certificate.
❖ A share certificate will provide the name of the company, name of the shareholder, number and
class of shares held by the shareholder and restriction on the shares.
❖ Companies must keep a register of all shares that are certificated and uncertificated:
- Number of uncertificated and certificated shares.
- Names and addresses of the people whom the shares are issued to.
- Number of shares issued to each person.
- Shares placed in a trust.
- Shares whose transfer has been restricted.
- Name of owners of shares and holders of beneficial interests in shares.
❖ The register is proof of what it provides unless there is contradictory evidence.
❖ The record of the uncertificated shares is administered and maintained by the central securities
depository (‘CSD’) or participant at CSD.
❖ In companies there are persons who hold shares on behalf of other people who may not want their
identity to be known e.g. because of safety.
❖ The shareholders who hold shares on behalf of others are known as nominee shareholders and
persons whom the shares are held on their behalf are known as beneficial shareholders.
❖ Companies should also have a register for such arrangements.
❖ Note that regulated companies are companies whose takeover is overseen by the Takeover
Regulations Panel. (Public companies, state owned companies and some private companies whose
percentage of shares has been transferred within the 24 months before the affected transaction (e.g
merger) or the offer exceed the percentage prescribed by the minister. The transfer of shares does
not include offer between related persons. The minister may prescribe a percentage that is not less
than 10%.

How securities (shares) are transferred

 A share as a personal right is transferred by cession. In other words, the transfer of shares from one
person to another entails the transfer of rights of those shares. The rights are:
→ the right to share in the dividends when they are declared,
→ right to participate in meetings,
→ and the right to share in the net asset value upon winding up of the company.
 The transfer of shares and registration of the transfer of shares are not the same and take place
separately.
 Registration of shares is not a requirement for the transfer of shares.
Statutory remedies for unlawful conduct by shareholders
➢ In a company context the majority rule applies.
➢ Decisions are taken based on the majority votes.
➢ This principle of majority rule can be abused by shareholders who hold the majority shares.
➢ The Companies Act 71 of 2008 (‘Act’) provides remedies that can be applied to remedy or solve
problems where majority shareholders abuse their power to the detriment of the minority.
➢ This part of the notes will deal with the remedies or protective mechanisms that are available to
the minority shareholders.
➢ Before we deal with the latter, let us deal with statutory remedies that are available when the
company is made to contravene the Act.
- Shareholders, directors, prescribed officers and trade unions may approach the court through application
to prevent the company from contravening the Act.
- Shareholders have a claim of damages against any person who wilfully, fraudulently or gross negligently
causes the company to contravene the Act or any restriction in the Memorandum of Incorporation
(‘MOI’)
- Any person who contravenes the Act is also liable to any person for damages suffered by that person.

Let’s move to statutory remedies available to minority shareholders in circumstances where the majority
shareholders abuse their power.

Shareholders’ declaratory order

Example: Best Tin (Pty) Ltd has three shareholders. Roy holds 40% shares, Jabu holds 45% shares and
Lucy holds 15% shares. The MOI of the company clearly provides that all shareholders are entitled to share
in the dividends of the company when they declared. Roy proposes a resolution that provides that in the
event that the company fails to make R3 million or more, shareholders holding less than 20% of shares will
not participate in the sharing of dividends. Roy and Jabu vote in favour of the resolution as they want to push
Lucy out of the company. Lucy is against the resolution as it is unfair to her.

 In these circumstances Lucy can apply to court for the shareholder’s declaratory order.
 As this is an application, the court will have affidavits from Lucy and from the company.
 Lucy’s affidavit will contain evidence that the company or its directors have acted unfairly towards her
as the resolution by shareholders aims to take away her rights to share in the dividends as per the MOI.
 The company’s affidavit will oppose Lucy’s evidence.
 Lucy’s affidavit will implore the court to issue a declaratory order determining that Lucy has the right
to share in the dividends as provided in the MOI.
 In terms of the declaratory order the court may also issue an order to protect Lucy’s right or correct any
harm done to Lucy by the company or its directors resulting from the contravention of the Act, MOI,
rules or contravention of any right (e.g Lucy should participate in the dividends).
 In circumstances such as these after the consideration of evidence, courts are likely to issue a
declaratory order in favour of Lucy as the actions of the company are unfair to Lucy and the majority
shareholders of the company have clearly abused the rule of majority.
Oppression remedy
Example: Best Tin (Pty) Ltd has three shareholders. Roy holds 40% shares, Jabu holds 45% shares and
Lucy holds 15% shares. The MOI of the company clearly provides that all shareholders are entitled to share
in the dividends when declared. Roy proposes a resolution that provides that in the event that the company
fails to make R3 million or more, shareholders holding less than 20% of shares will not participate in the
sharing of dividends. Roy and Jabu vote in favour of the resolution as they want to push Lucy out of the
company. Lucy is against the resolution as it is unfair to her.

In the same example, Lucy as a shareholder or any director can apply to court in order to implore the court
make an order of relief in Lucy’s favour because the:
 The act or omission of the company (The resolution of the company denies Lucy the right to share in
the dividends), or
 The business of the company,
 Or the powers of the directors of the company
 Are exercised in a manner that is oppressive or unfairly prejudicial or unfairly disregards Lucy’s
interests. (The action of the company is unfair to Lucy, it results in unfair loss or damages to Lucy and
clearly her interests are not taken into consideration)
 Lucy’s affidavit will provide evidence that the action of the company is oppressive, or unfairly
prejudicial, or unfairly disregards her interests.
 The court is likely to provide a suitable relief in Lucy’s favour. E.g. ordering the company to correct
the detrimental action to Lucy.

Dissenting shareholder’s appraisal right

Example: Best Tin (Pty) Ltd has three shareholders. Roy holds 40% shares, Jabu holds 45% shares and
Lucy holds 15% shares. Jabu proposes a resolution for Best Tin to merge with Green Tins (Pty) Ltd. Lucy
dissents or opposes the proposal as Green Tins is controversial and financially distressed. Lucy is of the view
that the merger will diminish her investment.
→ In the example Lucy can use the dissenting shareholder’s appraisal right.
→ This is the right that allows a shareholder who disagrees or opposes a resolution of the company to
require the company to purchase his or her shares at a fair value.
→ Lucy must notify the company of her opposition of the detrimental resolution.
→ Lucy must actually vote against the resolution that is detrimental to her.
→ Lucy must demand that the company pay a fair for her shares.
→ This is a protective mechanism that allows Lucy to escape from the company by receiving a fair value
for her shares in the event that the proposed resolution is detrimental to her.

Statutory derivative action

Example: Tom and Thabo are directors of RRR (Pty) Ltd a logistics company. Tom and Thabo also jointly
own a truck in their personal capacities. While negotiating a deal with Furniture world on behalf of RRR to
transport furniture to Durban, they offer Furniture world to transport its furniture with their own truck at a
cheaper cost in order to make a secret profit. Furniture world agrees. Ronnie, Rosina and Rose want the
company to institute a legal action to protect the interests of their company. They approach Gordon another
director of the company who was not part of the negotiations with the matter.
 Statutory derivative action allows shareholders (Ronnie, Rosina and Rose), directors (Gordon),
prescribed officers, trade unions or representatives of employees, or any person who has been granted
leave by the court to do so, to serve a demand on the company to start or continue legal proceedings to
protect the interests of the company.
 If the company fails, the court can grant leave to the person who submitted the demand to institute or
continue proceedings on behalf of the company.
Roles of the organs and officers of a company
 The organs of companies are directors and shareholders.
 The Act has introduced other organs and they are Social and Ethics committee and Audit
committee.
 Directors are controlling minds.
 Shareholders are investors
 Social and Ethics committee ensures that companies are responsible citizens.
 Audit committee ensures proper appointment of an auditor and that the auditor executes his or her
duties properly.

Shareholders’ meetings and how resolutions are passed.

 Shareholders have their say in shareholders’ meetings.
 General Meetings and Annual General Meetings (‘AGM’)
 In public companies AGM’S are held within 18 months after incorporation of the company and
subsequent AGM should be held once every calendar year and but not more than 15 months after
the previous AGM.

General meetings
(Please study paragraphs 27.17 to 27.18 on your own and note that you may be examined on them). Pay
special attention to the circumstances where the company must hold a general meeting 27.18 (a) – (e).

Textbook:

The board of a company, or any other person specified in the company’s memorandum of incorporation
or rules, may call a meeting of shareholders at any time.

A company must hold a shareholder’s meeting when:

(a) the board is required by the Companies Act 71 of 2008 or the memorandum of incorporation to
refer a matter to shareholders for decision;
(b) required in terms of section 70(3) to fill a vacancy on the board;
(c) otherwise required by the company’s memorandum of incorporation;
(d) an annual general meeting of a public company is required; and
(e) one or more written and signed demands for such a meeting is delivered to the company; each such
demand describes the purpose of the meeting; and the aggregate of the demands for substantially
the same purpose are made and signed by the holders of at least 10% (or lower percentage if
permitted by the memorandum of incorporation) of the shares entitled to be voted in respect of the
matter that is proposed [section 61(3) – (4)].
Resolutions
 Decisions taken at shareholders’ meetings are known as resolutions.
 There are two types of resolutions:
- Ordinary resolutions and special resolutions.
- Ordinary resolution to be passed as a decision of shareholders’ meeting should be supported by 51% or
more of the voting rights. This resolution is used to decide simple matters in the company.
- Special resolution on the other hand should be supported by 75% or more of the voting rights. This
resolution is used to decide big decisions in the company e.g. resolution to dispose all or greater part of
the assets of the company.
- The memorandum may provide a higher percentage or lower percentage for special resolution and a
higher percentage for the ordinary resolution.
- But there must always be a gap of 10% or more between the resolutions.

Directors
 Directors and the standards applicable to directors’ conduct:
→ Since companies cannot represent themselves in transactions, directors as controlling minds of
companies serve that purpose.
→ Directors are members of the board and they include alternate directors, de facto (directors not duly
appointed but acting as a directors) and de jure (director appointed as per the law) directors.
 Directors when exercising the powers and performing their functions owe rigorous duties.
 In other words, their conduct must be in accordance with the prescribed rigorous standard known
as the standard of conduct. Failure to act as such, directors will be held personally liable for the
loss suffered by companies.
 Let’s look at this standard or duties that are owed by directors when representing companies.

Directors’ duties and standards of conduct

The duties or the standards are provided by common law and statutory law. Common law is still
applicable alongside statutory law as long as it does not contradict statutory law.

Common law duties

 Directors are entrusted with the assets of the company.
 This means that they are in a relationship of trust with the company.
 Thus, when representing a company they must act in good faith and in the best interest of the
company.
 Good faith means to act with honestly at all times and best interests means that directors must
always promote the interests of the company.
 Good faith requires directors to avoid a conflict of interest, exercise powers for the purposes they
are granted, act with uninfluenced discretion and not exceed the limits of the powers.
 Contracts between directors and companies are not prohibited but they are voidable at option of
the company unless provided for in the MOI or approved by shareholders in a general meeting
(ratified).
 The directors liability for breach of the common law duty to act in good faith or failure to act in
the best interest of the company is not based on delict or contract but sui generis (unique). It is
based on the fact that the director occupies the position of trust in relation to the company.
 The director will be liable for loss suffered by the company if there is a breach of the
aforementioned duties.

Common law duty of care and skill

❖ The common law duty of care less strict compared to the common law duty to act in good faith.
❖ The duty of care and skill requires the director to apply his experience and skill in controlling
matters of the company.
❖ In terms of common law:
- Directors are not held liable for mere errors of judgment
- The duties depend on the size and the nature of the company.
- The duties depend on the obligations of the director.
- Directors are not required to give continues attention to the matters of the company where they are
entrusted to another official and may assume in the absence of fraud that the duties have been fulfilled
honestly.
- A director who breaches his duty is held liable in terms of delict.

Statutory standards of directors (statutory duties)

 Statutory duties are an improvement of common law. They are clear and stricter. This is likely to
protect companies from unscrupulous directors.
 In terms of section 76(3) (a) and (b) of the Act directors must act in good faith, for proper purpose
and in the best interests of the company:
 This means that directors like in common law:
- Must act honestly,
- Exercise their powers for the intended purposes and
- Always promote the interests of the company.
 In addition to the duty to act in good faith, in terms of section 76(3) (c) of the Act, directors when
executing their duties must act with the duty of care, skill and diligence that is reasonably expected
from a person who is carrying out the functions that are carried by the director of the company and
having the general knowledge, skill and experience of that director.
- The statutory duty of care, skill and diligence is stricter that the common law duty care and skill.
- This duty provides the reasonable director’s test as it requires ‘the director to act with the degree of care,
skill and diligence that is reasonably expected from a hypothetical director who is performing the duties
of the director in the company’. (objective elements)
 - Unlike in common law, directors now have the standard that they must meet when controlling matters of
the company.
- The words ‘having the general knowledge, skill and experience of that director’ mean that when applying
the reasonable director’s test, the experience, skill and knowledge of the company’s director is taken into
consideration. (subjective elements)
- E.g. A mechanical engineer who serves as a director in a company that manufactures industrial generators
will have a stricter duty of care when executing his duties. In the event that he purchases components or
parts that are of inferior quality and the company suffers a loss, the engineer will have a stricter duty of
care, skill and diligence compared to a director of the same company who is an accountant.
 The office of the director is by its nature risky as directors can take decisions that are detrimental
to the company.
 The Act in section 76(4)(a) provides a safe harbour or a protective mechanism for directors who
have taken decisions that are detrimental to companies. Directors will be taken to have complied
with duty of care, skill and diligence and the duty to act in the best interests of the company. This
is known as the business judgment rule. (‘BJR’)
 BJR has 4 elements and if all the 4 elements are present in a bad decision of the director, the
director will escape liabilty for the loss suffered by the company. The director will be safe from
liability.
 Let’s use an example to explain BJR.
 E.g Sam an engineer is a director of a Logistics Company. The company delegates Sam as the only
director of the company to purchase 10 trucks for the company. Sam purchases trucks for the
company and it turns out that the trucks are of inferior quality. Six months later, all trucks have
mechanical problems and will cost the company R1 million to fix them. The company loses the
money due Sam’s bad decision. The shareholders are of the view that Sam has breached his duty
of care, skill and diligence and should be held liable for the loss suffered by the company. Can
Sam escape liabilty?
 In terms of BJR Sam can escape liability for breach of the duty of care, skill and diligence provided
the four elements of BJR were present in the decision making process:
- Sam took reasonably diligent steps to become informed about the matter. (conducted reasonable research
about the trucks)
- Had no financial interest in the decision (did not stand to gain in the decision or make a profit)
- If Sam had a personal interest he disclosed it,
- He did believe on rational basis that the decision was in the best interest of the company.
 IF ALL THESE ARE PRESENT THEN HE WILL ESCAPE LIABILTY.
 But if any one of the elements was not part of the decision making process, then Sam is liable.
 Directors may rely on persons designated by the company to fulfil or execute certain duties e.g
Accountants or lawyers and may delegate.
 Directors have the duty to disclose personal financial interests in terms of common law and section
75 of the Act. e.g Where the director of the
 company is shareholder of ANOTHER company that is in business with the company where serves
as a director.
 Directors should not run the company recklessly, with the intention to defraud any person,
fraudulently and with gross negligence. E.g. concluding contracts knowing that the company is
insolvent, this will defraud creditors or concluding contracts while ignorant of whether the
company is insolvent or not.
 A director will be liable for the breach of statutory duties of acting in good faith, avoiding a conflict
of interest, failing to disclose personal financial interests and failing to act in the best interest of
the company in accordance with common law breach of the duty to act in good faith.
 This means that the common law provisions of the breach of the duty of good faith are applicable
in breach of statutory duties.
 Liability for breach of statutory duty of care, skill and diligence, or failure to comply with the
provisions of the Act or MOI will be based on delict in accordance with common law.
SU 2.5: Winding-up, liquidation and rehabilitation

Learning material

Business Law chapter 29

Learning objectives

At the conclusion of this study unit, you should be able to demonstrate your knowledge and
understanding of companies through your ability to:

1. Explain the role of winding-up;

2. Describe the various methods of winding-up;

3. Define and discuss the term “business rescue”;

4. Explain how the business rescue procedure aims to preserve companies and employment;
5. Explain the meaning and role of deregistration;

6. Apply the abovementioned principles/law to relevant but unfamiliar scenarios to solve practical

problems.

Introduction
 Companies exist from incorporation to dissolution.
 During their existence, companies will acquire rights and duties.
 This means that a company will have creditors.
 When a company is about to be dissolved, its assets must be collected, converted into cash and
paid to the creditors in accordance with the order of preference.
 The remainder of the money will be shared among the shareholders of the company.
 This process is known as winding up.
 This study unit deals with this process and it will also deal with the mechanism that aims to
rehabilitate financially distressed companies.

Role of winding-up
 To wind up a company is the process of dissolving a company.
 As aforementioned, the role of winding up is to collect all the assets of the company, convert them
into cash and pay creditors of the company what is due to them as per the order of preference.
 The winding up of solvent companies is regulated by the Companies Act 71 of 2008 (‘the current
Act’) and the winding of insolvent companies is regulated by the Companies Act 61 of 1973 (‘the
old Act’)
 Solvent companies are those whose assets exceed their liabilities and they are still able pay their
debts as they fall due in the ordinary course of business. These are companies that are financially
viable.
 Insolvent companies are the opposite of solvent companies. In other words, they are financially
distressed.
 Why would shareholders want to dissolve a financially viable company?
 Typical reason may be that the company has achieved its objective or the shareholders have died.

Various methods of winding-up

Winding up of solvent companies
• The winding up of solvent companies can be done in two ways:
1) Voluntary winding up and winding up in terms of the order of the court
2) Voluntary winding up in terms of the shareholders’ resolution
• Voluntary winding up of solvent companies is initiated by shareholders with a special resolution.
• The reason for a special resolution is that this is a major decision in the company as it will have
the effect of bringing the life of the company to an end.
• Special resolution requires 75% of the voting rights.
• The process of voluntary winding up by shareholders is simpler and faster and creditors do not
suffer any loss as the company is solvent.

Winding up of solvent companies in terms of the order of the court

◆ Note the parties that can apply for the winding up of a solvent company by the order of court.
◆ SEE OTHER PARTIES ON PARAGRAPH 29.08. Let me just briefly explain the three parties
only:
→ Business rescue practitioner is an official appointed to facilitate the rehabilitation of a financially
distressed company or to ensure that the creditors and shareholders receive a better return when a
company is liquidated.
→ Takeover Regulation Panel is a panel that is established in terms of the Companies Act 71 of 2008 to
oversee the process of affected transactions such as a merger or disposal of all or greater part of the assets
of companies in public companies, state owned companies and certain private companies.
→ Companies and Intellectual Property Commission known as the CIPC is among other things responsible
for the registration of companies, promote compliance with the Act and to enforce the Act and other
related legislation.

Textbook:

The company, business rescue practitioner, creditors, shareholders, directors and the Companies and
Intellectual Property Commission or Takeover Regulation Panel can apply for the winding-up of a
solvent company by court order [section 81].
Grounds of application:
o Please study the grounds on your own.
o Note that when a company is solvent and after the application for the company to be wound up as
a solvent company, it appears that the company is insolvent. An interested person may apply for
the company to be wound up as an insolvent company. (ground (b))
o Note that deadlock is where directors cannot reach a consensus in the management of the company
and shareholders cannot resolve the deadlock.
o The business rescue plan is a plan that must be developed by the Business rescue practitioner to
rescue financially distressed companies.
o Compliance notices are notices that are issued by the CIPC to a company that has contravened the
Act to comply with the Act.
o They direct contravening companies to comply with the Act.

Textbook:

The application for a winding-up order must be brought on particular grounds, depending on the identity
of the applicant. The grounds on which a winding-up order can be brought, are:

(a) The company can apply for its winding-up on the basis of a special resolution or on the grounds of a deadlock
[section 81(1)(a)].
(b) The business rescue practitioner can apply for the winding-up of a company on the grounds that there is no
reasonable prospect of the company being rescued [section 81(1)(b)].
(c) One or more of the creditors of the company can apply for a winding-up order on the grounds that the
company’s business rescue proceedings have ended as a result of the rejection of the company’s business
rescue plan and it appears to the court that it is just and equitable for the company to be wound up under the
circumstances or it is otherwise just and equitable for the company to be wound up [section 81(1)(c)].
(d) One or more shareholders can apply for the winding-up of the company on the grounds that there is a
deadlock [section 81(1)(d)]. An application can also be brought, with leave of court, on the grounds that the
directors, prescribed officers or others in control of the company are acting in a manner that is fraudulent or
otherwise illegal, or that the company’s assets are being misapplied or wasted [section 81(1)(e)].
(e) A director can apply for the winding-up of a company on the basis of a deadlock [section 81(1)(d)].
(f) The Companies and Intellectual Property Commission or Takeover Regulation Panel can apply for a
winding-up order on the grounds that the company, its directors or prescribed officers or others in control of
the company are acting in a manner that is fraudulent or otherwise illegal, and that the company has failed
to comply with a compliance notice in that regard, where enforcement procedures in terms of the Companies
Act 71 of 2008 or Close Corporations Act 69 of 1984 were taken against the company, its directors,
prescribed offers or those in control, within the previous five years [section 81(4)(b)].
Winding of insolvent companies
Like winding up solvent companies, insolvent companies can be wound up voluntary and by an order
of court.

Voluntary winding up of insolvent companies by creditors

 Voluntary winding of up insolvent company is initiated by shareholders’ special resolution.
 The resolution has to be registered.
 Directors have voting power in the election of the liquidator and have less protection than when
the company is wound by the court order.

Winding up by order of court

 This is the common way of winding up insolvent companies in South Africa.
 The application can be brought by the company, creditor of the company, shareholder, the judicial
manager (similar procedure as business rescue in terms of the old Act) or the minister.
 The control of the company will be taken from directors and vest on the Master, the provisional
liquidator and ultimately the liquidator.
 The liquidator is supervised by the Master of the High court.

Study the grounds of winding up of a company by the court order on paragraph 29.14. Note that in
terms of the previous Act the reduction of the shareholders of the public company below 7 was a ground
for winding up.

Textbook:

In terms of section 344 of the Companies Act 61 of 1973, an insolvent company may be wound-up by
the court:
(a) by special resolution;
(b) if it commences with business before a certificate to commence business has been issued;
(c) if the company has not commenced its business within a year from its incorporation or has
suspended its business for a year;
(d) if the number of members of a public company has been reduced to fewer than seven;
(e) if 75% of the share capital has been lost or has become useless for the company;
(f) if the company is unable to pay its debts as prescribed in section 345;
(g) if an external company is dissolved or ceases to exist in the country in which it has been
incorporated;
(h) if it appears to the court that it is just and equitable that it should be wound-up.
Business rescue
❖ One of the objectives of the current Companies Act 71 of 2008 is to develop the economy.
❖ Financially sound companies and employment of the people in the country contributes significantly
to the economic development.
❖ Thus, the Act has introduced Business rescue proceedings to rehabilitate financially distressed
companies to restore them to financial viability for the purposes of developing the economy and
to ensure that there is employment for the people of the country.
❖ Business rescue is a mechanism that is aimed rehabilitating financially distressed companies by:
- Granting companies a moratorium or grace period from the claims of creditors.
- Putting the company under temporary supervision and ‘
- Developing and implementing a rescue plan to rehabilitate the company or if not possible, allow creditors
and shareholders to receive a better return upon liquidation of the company.
❖ The main aim is to rehabilitate financially distressed companies.
- The company can be placed under business rescue by the board resolution or by order of court when
there is a reasonable prospect (reasonable grounds) of saving the company.
- Creditors, shareholders and employees are affected persons and can apply for an order of the court.
- Creditors of the company have to consider the merits of the business rescue plan, amend it if necessary
and vote for its implementation.
- The plan to save the company is developed by the Business rescue practitioner.
- Employees of the company that is under Business rescue plan are affected by the Labour Relations Act.

Deregistration
Role of deregistration (Study paragraph 29.22- 29.33) on your own.

Note that bona vacantia property is property that does not have an owner or claimed by an owner and
consequently accrues (goes) to the state.

Textbook:

When the affairs of a company have been completely wound up, the Companies and Intellectual
Property Commission will record the dissolution of the company and remove the company’s name from
the Companies Register [section 82(2)]. The only other circumstances where the Companies and
Intellectual Property Commission may deregister a company is if:

(a) the company has transferred to a foreign jurisdiction [section 82(3)(a) and (5)];
(b) the company did not file an annual return for two or more years in succession and has failed to
give reasons for the failure or failed to show cause for the company to remain registered [section
82(3)(a)];
(c) it has determined that the company appears to have been inactive for at least seven years and that
no person has demonstrated a reasonable interest in its continued existence; or
(d) it has received a request in the prescribed manner and has determined that the company has ceased
to carry on business and that it has no assets or that, because of the inadequacy of its assets, there
is no reasonable probability of the company being liquidated [section 82(3)(b)].
Deregistration does not, however, have any influence on the personal liability that every director or
shareholder of the company, or any other person, might possibly incur. The liability can be enforced as
if the company is not deregistered [section 83(1) – (3)]. In the absence of ascertainable claimants, the
assets of the company accrue as bona vacantia to the State.
SU 3: Close Corporations
SU 3.1: Introduction to close corporations

Learning material

Business Law chapter 30 – 31

Learning objectives

At the conclusion of this study unit, you should be able to demonstrate your knowledge and
understanding of companies through your ability to:

1. Discuss a close corporation (“CC”) as a business venture;

2. Identify and distinguish a close corporation (‘CC’) from a company by way of its characteristics;
3. Explain the relevance of CCs under the Companies Act of 2008;
4. Explain the procedure for the conversion of a CC to a company;
5. Discuss the membership of a CC and the nature of a member’s interest;
6. Discuss the requirements for a natural person to qualify as a member of a CC;
7. Explain how a member’s interest in a CC is acquired;
8. Explain how a member’s interest in a CC is transferred;
9. Explain the nature of a member’s interest and how security by means of member’s interest can
occur;
10. Apply the abovementioned principles/law to relevant but unfamiliar scenarios to solve practical
problems.

Introduction
Close corporation (“CC”) as a business venture, characteristics of the CC, relevance of the CCs under
the Companies Act of 2008 and conversion of CCs to companies.

In the past during the period of the Companies Act 61 of 1973 (‘Old Act’), companies were known for
being complex because they were regulated by complicated rules. Consequently, many entrepreneurs
were not able to easily incorporate companies. There was a need for a simpler vehicle to run business.
Therefore, legislators enacted the Close Corporations 69 of 1984 (‘CC Act’). This Act provided the
simpler entity that is similar to companies in many respects.

However, since the coming into effect of the Companies Act 71 of 2008, it is no longer possible to
incorporate new close corporations or convert companies into close corporations as the current Act is
known for its simplicity and makes it easy for entrepreneurs to incorporate companies. However, close
corporations that are in existence can exist indefinitely or they can be converted into companies.

Close corporations (‘CC’) as business vehicles share a number of similarities with companies.
Characteristics of a Close Corporation
CCs have the following characteristics or attributes:
• Like companies CCs have the separate legal personality (Juristic personality) and enjoy all the
benefits of the separate legal personality.
• CCs like companies their capacity is unlimited and it is comparable to that of a natural human
being. This means they can conclude any contract provided it is legal.
• It is easy and less costly to form CCs and they are subjected to simple legal formalities.
• It cannot have more than 10 members and members must be natural persons. Unlike in companies,
juristic persons cannot be members in the CC.
• Capital maintenance (stringent rules on how to use CCs money) rules have been simplified.
• To protect third parties who may conclude contracts with the CC, members of the CC may be held
personally liable for failing to comply with the prescribed requirements when concluding contracts
with third parties.
• CCs structure is flexible to cater for specific needs of members in the CC.
• Common law rules that regulate the relationships between the CC, members, and third parties have
been enacted in the CC Act to ensure that members have easy access to the law and know the rules
that regulate them.
• CCs are required to provide financial statements and balance sheets, however, the financial officer
of the CC need not be a qualified auditor. Even one of the members of the CC can be appointed as
the financial officer provided all members provide written consents.

These attributes clearly show that the CC is a simple structure that is regulated by simple regulations.
This had the effect of allowing entrepreneurs to start small and simpler entities to participate in the
commercial world. The existing CCs contribute a lot in the development of our economy as they allow
small enterprises to participate in the commercial world. Small enterprises are regarded as important
economic drivers in South Africa.

Conversion of a CC
CCs can be converted to companies in the following manner:
o The CC files the notice of conversion from CC to a company.
o The prescribed fee should be paid.
o The conversion should be supported by members holding 75% or more of the members’ interest.
(Note that this resembles the special resolution found in Companies)
o The notice of conversion must also contain the written consent by members indicating that
members holding 75% members interest have approved the conversion.
o The notice of conversion must also be accompanied by the Memorandum of incorporation (MOI)
of the company. Going forward the new company will be regulated by the Companies Act 71 of
2008 and the MOI as the constitutive document of the company.
o The CIPC will cancel the registration of the CC and give notice of conversion in the Government
Gazette. (This will ensure that those wo have an interest such as creditors of the CC have the
knowledge of conversion)
o Every member of the CC will become the shareholder of the company and shares that each member
will hold need not be equal to the member’s interest that was held in the CC.
o The assets, liabilities and rights of the CC will now be held by the company. Any legal proceedings
or debts that are pending against the CC will be instituted or claimed against the company as if
conversion never took place. This will ensure fairness to third parties.

Membership of a CC and the nature of member’s interest

In a CC we do not have shares. When a member makes a contribution to the CC or acquires another
member’s interest, the member holds the member interest. The member’s interest will be in percentage.
e.g. Samson holds 10% member’s interest at TTT CC.

In other words, like with shares the member is entitled to:

 Share in the profits made
 Partake in decision making voting.
 Partake in management.
 To share in the remainder of assets of the CC when the CC is dissolved.

CCs can only have no more than 10 members.

Requirements for a natural person to qualify as a member of a CC

Natural persons qualify as members provided:
 A natural person is entitled to a member’s interest. Sam dies and bequeaths his member’s
interest to Lucy his daughter.
 A trustee of testamentary trust in his official capacity and no juristic person is a beneficiary of
such a trust (through a will).
 In his official capacity as trustee, administrator, executor of an insolvent estate, deceased estate,
mentally disabled member, or member who cannot manage their affairs or a duly appointed or
authorised legal representative.
 Note in paragraph 31.05 that a juristic person can only be a member of of a CC only in his
official capacity as a trustee, administrator, executor or curator.
Nature of a member’s interest
➢ Member’s interest represents the single interest held by a member.
➢ It is represented by percentage. E.g Donny holds 35% member’s interest.
➢ The total aggregate at any given time in the CC must be 100%.
➢ Two or more persons cannot be joint holders of the same member’s interest in the CC.

Acquisition of member’s interest

How a member’s interest in a CC is acquired;
 When a new member acquires member’s interest an amended founding statement must be filed or
lodged.
 A certificate signed by all members indicating new member’s interest must be issued to each
member.
 Member’s interest can be transferred in four ways.

Admission as new member

 A person can be added in the CC provided that the she contributes money or property in the CC and the
new member will granted member’s interest in terms of percentage. Services are not regarded as
contribution.
 Since member’s interest of the CC must always be 100% (ALWAYS DURING THE EXISTENCE OF
THE CC), the new member’s interest will have to be granted by adjusting the existing members’
interests.
 E.g. The CC has 2 members who hold 50% member’s interest each. When the third member comes into
the CC and contributes money and members agree that his contribution is equivalent to 30% member’s
interest. This means that the existing members’ interest will be adjusted to 35% each to accommodate
the new member. The total will still be 100%. This must be done in terms of the agreement between the
existing members and the new member.

Acquisition of an existing member’s interest

▪ A new member can acquire a member’s interest from another member through donation, purchase or
exchange. The same arrangement provided under admission as new member is applicable. The amended
founding statement must be lodged.
▪ However, the disposition of the member’s interest must be done in accordance with the association
agreement which is an internal document that regulates relations within the CC. Usually the association
agreement will contain a pre-emptive right which grants the existing members the right to first purchase
the member’s interest before it can made available to outsiders.
▪ If there is no pre-emptive right in the association agreement, all members of the CC must consent to the
transfer of member’s interest to the outsider.
Acquisition from an insolvent estate
o The trustee of the insolvent estate must sell the insolvent member’s interest to the CC if there are other
members other than the insolvent member.
o Or to the existing members in pro rata (in proportion) their member’s interest
o Or to an outsider who qualifies to be a member.
o The adjustment process as provided above must also be complied with and the amended founding
statement must be lodged.

Acquisition from a deceased estate

This executor must deal with the member’s interest in accordance with the association agreement. If the
association agreement does not prescribe any directive, then the executor must do the following:
 The executor should transfer the member’s interest to the legatee or the heir of the deceased
provided that other members consent.
 If they fail to consent, then the executor will sell the interest to the CC, existing members or an
outsider in the same terms as in Insolvency.

Transfer of member’s interest

 Membership of a member commences on the date of registration of the amended founding
statement.
 The CCs Act provides the procedure to transfer member’s interest.
 However, the association agreement may provide the process.
 Since member’s interest is a personal right, it is transferred by cession which is the transfer of
rights of member’s interest.
 It is safe to provide the certificate as proof of transfer of member’s interest.
 But the transferor is still liable for what he or she owes to the CC.

How security by means of member’s interest can occur;

 Member’s interest is incorporeal thing which means we cannot touch.
 Certificate evidencing member’s interest on the other hand is corporeal (we can touch) and
movable property.
 Like a share in the company it can be used as security.
 A security is any property provided by the debtor to the creditor as a guarantee that the debtor will
fulfil his obligation to the creditor. When the debtor fails to fulfil the obligation she will forfeit the
property to the creditor. Security protects the interests of the creditor.
Personal rights as pledge
 The personal rights of the member can be used as security for the debt owed by the member and if
the debtor fails to pay, the member’s interest can be sold to satisfy the debt owed to the creditor.
 The member remains the owner of the member’s interest and the creditor acquires a real right to
the member’s interest.

Cession in securitatem debiti (also known as security cession)

→ This is where the debtor transfers her member’s interest rights to the creditor and the two agree
that the creditor will cede back the member’s interest upon payment of the money owed to the
creditor.
→ This cedent who is the debtor has the personal right against the creditor who is the cessionary to
cede back the interest in terms of pactum fiduciae.
→ The member’s interest does not form part of the insolvent estate of the cessionary.
SU 3.2: Internal and external relations, maintenance of capital and liability of
members

Learning material

Business Law chapter 32 – 33

Learning objectives

At the conclusion of this study unit, you should be able to demonstrate your knowledge and
understanding of companies through your ability to discuss and explain:

1. The internal relationships between the members of a CC;

2. The management of a CC;
3. The capacity of members to represent the CC;
4. The relationship of the members vis-à-vis the CC;
5. The acquisition of a member’s interest;
6. Financial assistance in respect of the acquisition of a member’s interest;
7. Payments to members;
8. The circumstances in which the members of a CC incur personal liability for the debts of the CC;
9. The abuse of a CC;
10. The accounting practice of a CC;
11. Apply the abovementioned principles/law to relevant but unfamiliar scenarios to solve practical
problems.

Relationship Inter Se

 The internal relationships between the members of a CC

 Internal relations between members of the CC are regulated by the association agreement.
 This is where the CC has two or more members.
 It is not compulsory for members to agree on the association agreement.
 In the association agreement members can agree on matters that are provided for in the Close
Corporations Act 69 of 1984 (‘CC Act’) and any other matter that may be regulated in accordance
with the Act.
 The association agreement must be in writing.
 The association agreement must not be inconsistent with the CC Act.
 In the absence of the association agreement, relations between members will be regulated by the
CC Act.
 Unalterable (cannot be changed) provisions of the CC Act.
- Disposal of the insolvent member’s interest
- Members who are disqualified from taking part in the management of the CC. (Persons under legal
disability, minor, unrehabilitated insolvent, person who is disqualified from being a director, and person
removed from office of trust due to misconduct etc.)
- The power of every member to convene a meeting by notice.
 The provisions providing the above regulations cannot be changed. They should be applied as they
are provided in the Act.
 Alterable provisions (provisions that can be changed)
- Section 46 among other things, provide that all members of the CC are entitled to participate in the
management of the CC.
- The CC shall indemnify members for expenditure incurred in running of business of the CC or
preservation of the business of the CC.
- Payments to members because of their membership shall subject to the agreement of the members be
paid in proportion to the member’s interest.
 The aforementioned provisions can be changed in the association agreement. In other words, the
association agreement can provide different regulations.

The management of a CC
◆ Parties in the CC have the equal right to participate in the management of the CC.
◆ However, parties may mutually agree that certain members are excluded from management. E.g
Members of a CC with 10 members may agree that only two of the members are responsible for
management.
◆ Decisions are adopted by 51% percent or more member’s interest.
◆ Crucial decisions as provide in paragraph 32.10 of the textbook require written consent of a member or
consent of members holding 75% of the member’s interests.
◆ There are members who are excluded in the management because of their attributes or history. This is
with the aim of protecting the CC, creditors and other members. See paragraph 32.11 and 32.12 of the
textbook.

Textbook:
Persons without legal capacity are disqualified from taking part in the management of the CC. The
following persons are incompetent to share in the management of the CC and can take part only once a
court grants permission:

(a) An unrehabilitated insolvent.

(b) Any person removed from an office of trust on account of misconduct.
(c) Any person who has been convicted of theft, fraud, forgery or the uttering of a forged document,
perjury, any offence under the Prevention of Corruption Act 6 of 1958, or any offence involving
dishonesty or in connection with the formation or management of a company or a CC who has
been sentenced in connection therewith to imprisonment of at least six months without the option
of a fine.
The capacity of members to represent the CC
 Every member of the CC has an equal power to represent the CC.
 However, members can agree internally that other members are excluded from representing the
CC when concluding contracts with third parties.
 The fact that a member is excluded from representing the CC is only relevant in the CC among
members and it is irrelevant in relation to a third party who did not know that the member had no
authority.
 Thus all members are agents of the CC.
 Any contract concluded by a member with the third party regardless of whether it is in line with
the business of the CC or not will be bind the CC unless:
- The member has no authority.
- And the third party knows or ought to have reasonably known that the member has no authority.

Relationship vis-à-vis CC
 The relationship of the members vis-à-vis the CC
 Although members of the CC have a close relationship, each member of the CC owes the CC the
fiduciary duty to act in good faith and also to act with the degree of care and skill.
 Duty to act in good faith entails the following:
→ To act honestly at all time.
→ To exercise the power in the best interest of the CC
→ Not to exceed the power.
→ Members interests should not be in conflict with the interests of the CC.
→ Members should not make a secrete profit that they are not entitled to at the expense of the CC.
→ Members should not compete with the CC. ‘
→ A member that has personal financial interest must notify every member at earliest opportunity.
→ Where there is personal financial interest of a member and the member fails to disclose to every
member the contract between the CC and him as a member, the contract is voidable at the option
of the member and any interested person may apply to court for an order in relation to the
personal financial interest. (The court will make the order based on equity.)
→ Where a member breaches the fiduciary duty to act in good faith, the CC may recover the loss
suffered as a result of the breach.
→ If all members ratify the breach before it takes place or after, then the breach of good faith will
not lead to the member’s liability for the loss suffered by the CC.
Duty of care and skill
❖ Like in companies members of the CC when managing the affairs of the CC owe the duty to act
with the degree of care and skill that is reasonably expected from the person of the member’s skill
and experience. This is a subjective test as the focus is on the attributes of the member which are
his skills and experience.
❖ When members are contracting with third parties they are expected to act as provided above. In
other words, their conduct should meet the test or the standard provided above.

Proceedings against fellow members on behalf of CC

Study paragraph 32.29 on your own.

Textbook:

Any member may institute proceedings on behalf of the CC against a member or former member of the
CC, if such member or former member has failed to make his initial contribution or any additional
contribution or where such member has breached his fiduciary duties or duties of care and skill. A
member may institute proceedings only after notifying his fellow members of his intention to do so
[section 50(1)].

Maintenance of Capital and Liability of Members

The acquisition of a member’s interest
 Like in companies the finances of the CC are also regulated by protective provisions to ensure that
the CC achieves its objectives:
- They can be used when all members provide consent.
- When solvency and liquidity test is complied with.
 Thus, before member’s interest can be acquired by the CC using its money, the following
requirements must be complied with:
- Consent from all members.
- Compliance with solvency (assets exceed liabilities) and liquidity (ability to pay debts) test.
- Failure to do so, every member who was a member before the acquisition and the former member to
whom money was paid will be liable for the liabilities of the CC before the transaction.

Financial assistance in respect of the acquisition of a member’s interest

 CCs like companies can provide financial for the acquisition of the member’s interest provided
these requirements are complied with:
- Consent from all members
- Solvency and liquidity test
- Failure to do so, members and beneficiaries will be liable for all the debts of the CC before the financial
assistance.
Payments to members
o CC may pay members by virtue of their membership.
o This may happen many times in the financial year.
o The payments must be approved by the support of members holding 75% of member’s interest.
o The CC must still be solvent and liquid after the payment.
o Failure to do so, the member should pay back the money.
o If the CC is wound up, payments made with 2 years before the CC is wound should be repaid to
the CC by the member unless the member can prove that after the payments, the CC could still
comply with solvency and liquidity test.

The circumstances in which the members of a CC incur personal liability for the debts of the CC
Study the table on 33.11 on your own.

Note that section 39 and 40 of CC Act provide the requirements that must be complied with before
payment by the CC:
 All members should consent
 Solvency and liquidity test must be complied with.

Textbook:
The abuse of a CC
When the business of the CC is carried:
 Recklessly, negligently, with intent to defraud or fraudulently e.g Member concluding contracts
with third parties while ignorant of the fact that the CC is insolvent (recklessly or negligent trading)
or with intent to defraud creditors where the member knows that the CC is insolvent,
 The master, liquidator or creditor may apply to court to declare the person who wilfully participated
in the running of the CC in as such manner to be personally liable for the debts of the CC.

Abuse of legal personality

Where the separate legal personality of the CC is abused, courts may disregard it to give an appropriate
order.

The accounting practice of a CC

 CC must keep financial records.
 In the founding statement which is the constitutive document of the CC, CC must put the date on
which its financial year will end.
 All members of the CC must within nine months of the financial year end make sure the financial
statement is out in one official language.
 Note what should be in the annual financial statement.
 Every CC must appoint an accounting officer and the officer must provide written consent to be
appointed this must be lodged with founding statement to the Registrar.
 Note the duties of the accounting officer.
THEME 8: SELF ASSESSMENT

SU 1: Partnerships
Practice question

In January 2018 Humbulani, Chris and Rian entered into a partnership agreement whereby they would run a
business together as partners under the name HCR & Associates. The sole purpose of the business was to buy and
sell classic cars for profit. The parties agreed to contribute R1 million each to the business and to share profits
equally. Humbulani and Chris paid their contributions immediately upon signing the agreement while Rian
undertook to pay his contribution on 31 March 2018. Clause 5 of the partnership agreement provided that only
Humbulani and Chris were authorised to conclude contracts on behalf of HCR & Associates.

Yesterday Humbulani and Chris discovered that Rian had concluded a contract of sale on behalf of the partnership
for the purchase of 300 merino sheep from Mr Smith at a total price R300 000. Apparently Rian received a
commission of R3 000 from Mr Smith for concluding this agreement. Rian did not disclose this commission to his
two partners. Humbulani and Chris are incensed that Rian concluded this contract in breach of clause 5 of the
partnership agreement. They are also unhappy that to date Rian still has not paid his contribution despite his
undertaking to do so by 31 March 2018.

Answer the following questions in light of the above facts and the principles of the law of partnership.

(a) What recourse do Humbulani and Chris have against Rian in respect of the unpaid contribution? (4)
(b) Is HCR & Associates bound by the contract concluded by Rian in this instance? (4)

SU 2.1: Introduction to company law

Question 1
Jack and Sam want to start a company to build houses in the Pretoria East. They want the shares of their company
to be accessible to a closed circle of friends who studied with them at University, the want a small entity, and do
not want their company to be subjected to rigorous accountability requirement in terms of the Companies Act 71
of 2008. Which types of a company is suitable for their intended business and provide reasons for your answer?
(5)

Question 2
Suppose Sam and Jack the shareholders of the company who are also directors of the company defraud Sipho by
taking money from him without rendering the service. They subsequently divert all the money of the company to
an offshore account in order to avoid reimbursing Sipho. They argue that Sipho can only claim his money from
the company as it has a separate legal personality. Is there an available recourse to Sipho and if so, explain in full?
(5)
SU 2.2: The memorandum of incorporation
Jamie and Zac two of the five shareholders of the company want to propose a resolution to amend a certain
provision of the MOI of the company because it is unfair to them as shareholders. Jamie holds 5% of voting rights
and Zac holds 6% of voting rights.

Explain to Zac and Jamie whether they can propose the amendment of the MOI? (5)

SU 2.3: Capital

Trotale (Pty) Ltd is a company that manufactures fuel efficient generators in Pretoria. The company is owed R70
000 by each of its five shareholders. The board of directors of the company wants to waive the shareholders’ debt
owed to the company.

Explain to the board of directors whether this is possible and if so, explain the prerequisites that should be
complied with. (6)

SU 2.4: Organs, shareholders and officers

Betty a structural engineer is the only director of GY (Pty) Ltd, a company that specialises in constructing buildings.
Betty is tasked by the company to purchase the required tools to build long buildings. Betty concludes a contract
with BT (Pty) Ltd for the purchase of tools. 2 months later it transpires that the tools are not suitable to build long
buildings and they are of inferior quality. As result of Betty’s decision, the company suffers a loss of R10 million.
The shareholders want to hold Betty liable for the loss suffered by the company.

1.1 Is there a statutory duty that Betty breached? (1)

1.2 Explain fully what the duty entails? (6)

1.3 Is there protective mechanism that is available to Betty to escape liability for the bad decision? (1)

1.4 Explain fully what the protective mechanism entails. (6)

SU 3.1: Introduction to close corporations
Sam who was a member at VT CC has passed on and is only survived by his son Themba. Sam held 15% member’s
interest in the CC. Themba who is the only heir of his father’s estate wants to know what will happen to his father’s
interest in CC.

Explain fully to Themba. (5)

SU 3.2: Internal and external relations, maintenance of capital and liability of

members
Themba is a member of the GDU CC. The association agreement provides that he has authority to participate in
the management and to conclude contracts on behalf of the CC. The CC is insolvent and Themba is aware of that.
However, Themba purchases merchandise on behalf of the CC from HY Ltd on credit. He hopes that the CC will
make enough money by selling the merchandise bought on credit from HY. Explain fully the nature and
consequences of Themba’s action. (5)
Explanatory note on contracts with minors

There is some debate in academic circles on the classification of contracts concluded by minors without
assistance. This is because of the recognition by the law of some contracts that minors can conclude
without assistance or consent of the minor’s parents or guardian.

For the purposes of BER310, this is the position of the law:

The general rule is that contracts concluded with minors are void because minors lack contractual
capacity. They cannot enter into contracts without assistance and need assistance to conclude valid
contracts because “[t]his assistance or consent supplements the inadequate powers of judgement of the
person with limited contractual capacity” (Nagel Commercial Law par 5.13).

The law nevertheless developed its own rules in order to cater for contracts by minors.

First, there are exceptions to the rule that all contracts entered into by minors without assistance are
void, such as where a minor only acquires rights without incurring duties (for more examples, see Nagel
Business Law par 3.151). This contract is valid.

Second, where a minor concludes a contract with another party and performs fully.

 The contract is void as the minor lacks contractual capacity. In other words, the contract is
unenforceable.
 However, the minor can claim his performance from the other party in terms of restitutio in
integrum. In other words, the other party must put the minor back to the position where the minor
was before the conclusion of the contract.
 The minor can be held liable if he has been enriched at the expense of the other party.
 Also, the minor has the choice of ratifying the contract or rejecting it with assistance of the guardian
or when attaining 18.
 If the minor decides to reject the contract, then the other party must restore the minor back to the
position he was in before the contract and the minor must return to the other party what he has
benefited (enrichment) from the contract in terms of restitutio in integrum.
 If the item the minor gained from the contract is lost or destroyed, then the minor will not be held
liable but will incur liability for the benefit gained from the item.

Third, in cases where the minor fraudulently created an impression that he had contractual capacity, the
contract is void. However, the minor will forfeit what he has performed.
These are sometimes known as limping contracts because parties, which are the minor and the other
party are not in equal positions. The guardian of the minor can decide to ratify the contract or the minor
can ratify it when attaining 18.

 In view of the fact that such contracts can be ratified, are they void or voidable?
 Void means that there can be no legal consequences.
 Voidable means that the minor can decide to render the contract void or valid.

For purposes of BER 310, these contracts are void as the general rule is that minors lack contractual
capacity. However, as aforementioned, we need to note that there exceptions such as those set out in
paragraph 3.151 on page 45-46 of the Business Law textbook.
Explanatory note on law of purchase and sale

South Africa follows an abstract system of transfer of ownership: this means that a valid contract of
purchase and sale is not a requirement for ownership to be transferred and that a contract of purchase
and sale does not transfer ownership. The contract creates the obligation but the actual transfer of
ownership still needs to take place (eg if you agree to meet a friend for lunch (create the obligation),
you only meet once you actually arrive at the restaurant (do what you are obliged to do)).

*(No accidental (oopsie!) transfer of ownership takes place here – it happens deliberately)

 A contract creates personal rights and has specific requirements such as consensus, contractual
capacity, legality, physical possibility and formalities; purchase and sale: intention to buy and sell,
consensus on the object sold and the purchase price
 Transferring of ownership creates real rights and specific requirements are needed: intention to
transfer ownership and intention to receive ownership, delivery and payment (if it is a cash sale)
or registration in the name of the buyer (which constitutes delivery for purposes of immovable
property).
 Entering into a contract of purchase and sale does therefore not transfer ownership of the thing
sold to the purchaser. Although it can create the obligation to do so, the steps to actually transfer
ownership must be taken.
 A seller who is not the owner of the object sold may enter into a valid contract of purchase and
sale to sell that object – the seller does not have to the owner of the thing sold. Sale of a res aliena
does not affect the validity of the contract because it is not a requirement or an essentialia of a
contract of purchase and sale that the seller must be the owner of the thing sold.
 The seller must transfer all the rights that he or she has in the object to the purchaser (if ownership
is one of them, the ownership must be transferred; if not, then there is no duty to transfer
 ownership). If the seller is the owner, the steps to transfer ownership (such as delivery of and
payment for the object sold where e.g. a vehicle is sold in a cash sale) must take place. If the seller
is not the owner, he or she has no duty to transfer ownership because it is not a right that the seller
holds in the object and due to the nemo plus iuris rule (you cannot transfer more rights than you
have).
 In order to protect the purchaser in cases where the seller is not the owner, the warranty against
eviction forms part of the contract as naturalia. This warranty protects the purchaser/ provides the
purchaser with a right of recourse against the seller if a third party with better rights than the
purchaser disturbs the purchaser’s use, enjoyment and right of disposal of the property.
 In order to be able to rely on this warranty, there has to be a valid contract because the warranty
forms part of the naturalia of the contract of purchase and sale (and hence a contract of purchase
and sale must exists for the buyer to have this warranty).