LAW SOCIETY DISCOURSE The legality of a contract
I None of its recent discourses, the Law Society introduced the basics of a contract. A valid contract is one that meets the basic legal elements required for the formation of a contract. Basically, for a contract to be enforceable it must be lawful and not contrary to law, which includes the common law, statutory law, public policy and good morals. All contracts are agreements but not all agreements are contracts. In this week’s discourse, the Law Society delves deeper into a contract and unpacks the legality of a contract by highlighting significant differences between a VOID and a VOIDABLE contract.
VOID CONTRACTS
Any agreement intended to violate the law and any agreement forbidden by law is void. It is an illegal agreement and cannot be classified as a valid contract. Contracts may be classified as illegal for two (2) reasons: Firstly, because the entire objective is illegal; secondly, because though the objective is perfectly legal, the manner used for the formation of the objective is against the law. A void contract has no legal force or effect. For example, a contract to kill would be void, because it has an illegal purpose. Another example of an illegal contract is if one of the parties to the contract is legally classified as mentally incompetent. In that case, the contract is void as it violates one of the four essential elements of a valid contract, namely capacity to enter into a contract. A contracting party must be legally competent to enter into a contract. By way of example, minor children cannot possibly have capacity to enter into a contract unless the child is duly assisted by his or her parents. The other requirement of mutual consent is similarly impacted because the mentally incompetent contracting party is in no state to understand the legal act he is getting into, whereas by the very nature of a contract, this is absolutely necessary. Accordingly, even if the object of the contract is lawful and there is money or due considerationfor the obligations undertaken in the contract, the lack of capacity and mutual consent remain unfulfilled in such a situation.
In the local case of Mandla James Dlamini vs Select Management Services (Pty) Ltd and others, where the applicant sought an order declaring that the loan agreement for the amount of E38 000 (thirty-eight thousand Emalangeni) entered into by the parties null and void, the High Court held that the fixed amount of interest charged on the principal debt is unlawful as being in excess of the permissible rate of interest prescribed by the then subsisting Money-Lending and Credit Financing Act. The monthly salary deductions on the applicant’s salary were also declared unlawful, and contrary to Section 56 (4) of the Employment Act No. 5 of 1980, which regulates the amount of deductions that can be made from an employee’s salary. The term ‘void contract’is an oxymoron or a contradiction in terms because a contract held to be void does not exist in law. In other words, although two parties may have come to an agreement, it is not recognised as a valid or legal contract.
VOIDABLE CONTRACTS
Unlike a void contract, a voidable contract is a valid contract which may either be affirmed or rejected at the election of one of the parties. At most, one party to the contract is bound. Voidable contracts are contracts that may be cancelled by one of the two parties involved. A contract may be voidable for various reasons, but in most cases voidable contracts provide for one of the parties to withdraw from the agreement without penalty. A voidable contract provides the option to rescind by either party. At the formation of the contract, it is valid but it could be voided in the future. A party to a contract may be permitted to rescind the contract and obtain restitution if he was induced to give his assent by the improper conduct of the other party. In Vusie Khoza and another vs Faustine Dlamini (1551/2012) (2017) SZHC 55 (March 23 2017) the main types of conduct which were regarded as improper and justifying rescission were identified as misrepresentation (including non-disclosure), duress and undue influence. A contract induced by misrepresentation, duress or undue influence is voidable (rescindable), not necessarily void. In other words, the innocent party is entitled to rescind the contract, but is not obliged to do so. Until rescission, the contract remains valid.
MISREPRESENTATION
Misrepresentation can be defined as a false statement of a past, present of future fact made by a party to a contract, either expressly or tacitly before or at the time of the contract, concerning some matter or circumstance relating to the contract. The false fact must neither be law nor opinion. This can be made intentionally or negligently. Misrepresentations are classified as being fraudulent, negligent or innocent. In the local case of Khoza vs Kunene (NULL) (2004) SZHC 163 (12 October 2004) it was stated that “A transaction induced by ... (misrepresentation) may, in some cases, be void ab initio; in other cases it is voidable only, at the option of the party... (misled). Where the ... (misrepresentation) is such that there is no meeting of the minds or mutual consent (consensus ad idem), the transaction is void. But where there is consent, even where the consent was obtained by fraud...(misrepresentation) the transaction is not void but voidable.
Elements of Misrepresentation
◗ Contracts are voidable if the misrepresentation has influence upon the motive or reason for the conclusion of the contract.
Misrepresentation must be material and persuade the other party to conclude the contract.
A person claiming misrepresentation must prove that a false statement was made.
A mere expression of opinion, however, is not a misrepresentation. Puffing does not constitute misrepresentation.
Irrespective of whether the misrepresentation was made fraudulently, negligently or innocently, a party is entitled to be restored to the position
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◗ they were in prior to the creation of the contract (restitutio in integrum) if the misrepresentation:
◗ Was made by the other party to the contract.
Was made with the intention of inducing the aggrieved party to contract.
In-fact induced the aggrieved party to enter into the contract.
Was material.
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DURESS
Duress or metus is improper pressure that amounts to intimidation. It involves coercion of free will. For instance, where a party is forced to choose between entering into a contract and suffering some harm. A party who consents to a contract under such circumstances does so out of fear inspired by an illegitimate threat. The consent is real but improperly obtained. This seemingly valid contractmay be set aside at the election of the threatened party, provided that certain requirements are met.
In the Supreme Court of South Africa’s case of Arend Another vs Astra Furnishers (Pty) Ltd 1974 (1) SA 298 (C ) at 305-306 which dealt with the elements necessary to set aside a contract on the ground of duress, it was stated as follows:
“It is clear that a contract may be vitiated by duress (metus), the raison de’etre of the rule apparently being that intimidation or improper pressure renders the consent of the party subtracted to duress not true consent. Duress may take the form of inflicting physical violence upon the person of a contracting party or of inducing in him a fear by means of threats.” Where a person seeks to set aside a contract, or to resist the enforcement of a contract, on the grounds of duress based on fear, the following elements must be established: (i) The fear must be a reasonable one. (ii) (iii) (iv) (v)
It must be caused by the threat of some considerable evil to the person concerned or his family. It must be the threat of an imminent or inevitable evil.
The threat or intimidation must be unlawful or contra bonos mores. The moral pressure used must have caused damage.
UNDUE INFLUENCE
This is the instance whereby consensus was improperly obtained. Undue influence is also a form of improper pressure brought to bear upon a person to induce a contract, but the pressure is more subtle, involving as it does, without any threat of harm, an undermining of the will of the other party. The pressure usually emanates from a close or fiduciary relationship in which one party abuses a superior position to influence the other. To set aside a contract on the ground of undue influence, the party so affected must establish that the other party obtained an influence over him, that this influence weakened his powers of resistance and rendered his will compliant, and that the other party used this influence in an unscrupulous manner to induce an agreement that he would not have concluded with normal freedom of will. Unconscionable exploitation of another's emergency is akin to undue influence: Both have been described as abuse of circumstances, and both render the contract voidable. In suitable cases, delictual damages may also be claimed.
Requirements for duress:
◗ One contracting party must have obtained influence over the other party.
Influence must have weakened the prejudiced party’s resistance and rendered his will pliable and open to manipulation.
Influence must have been used in an unconscionable manner.
Influence must have convinced the prejudiced party to reach consensus to his own detriment.
Prejudiced party reached consensus which he would not have done had there not been undue influence.
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PURE CONSENT AN ESSENTIAL REQUIREMENT IN THE CONCLUSION OF A CONTRACT
If the reader reflects on the prohibitions of misrepresentation, duress and undue influence in the formation of contracts, it becomes clear that nothing less than pure consent of the contracting parties underpins these contracts. In other words, these contracts are enforceable because they have been made with the free will of the parties and a contracting party is entitled to his bargain in terms of the contract they have entered into. This is important because contracts can be so huge that they significantly impact major economies of the world.