We enter into contracts every day of our lives, even when we don’t sign any documents.
Whenever you buy something at your local supermarket or order a pizza, you have entered into a binding contract which has legal consequences.
- What is a “contract”?
This can be described as a legally recognised relationship, coming into existence between two or more persons, when they reach an agreement that each party will have certain rights and obligations in respect of the other.
- The requirements for a valid contract
· Legal capacity: The parties must be competent to contract. A party must have the ability to formulate an intention and to act accordingly. He must understand what the consequences will be. An infant or mentally ill person can for instance not enter into a valid contract;
· Consensus: The parties must have “a meeting of the minds” regarding the nature of their contract and each party’s rights and obligations. Consensus can be reached expressly (when for instance each party’s rights and obligations are written down) or tacitly (where you buy bread without speaking to the cashier);
· The agreement must be legally executable. It is for instance not possible to enforce an agreement in terms whereof a person was supposed to pay you to kill another;
· The agreement must be practically executable. It is for instance not possible to execute an agreement of sale of a stud bull where same has already died;
· Formalities: Parties may make their agreement subject to certain formalities. Often, the law prescribes certain formalities. Land (or an interest therein) can for instance not be sold without a written agreement.
Although most agreements need not be reduced to writing in order to be valid, the biggest problem encountered when a deal goes sour is the debate around what the exact terms of the agreement actually were. This is why it is always advisable to reduce agreements to writing, including all material terms. Parties are bound by what they have signed.
Once a contracting party makes an offer to another, containing all the essential elements of the proposed agreement, and this offer is accepted without qualification, a contract comes into existence (whether in writing, orally, or tacitly). In practice, parties will often discuss and clarify terms and make various offers and counter-offers before this happens.
- Factors impacting upon the validity of contracts
· Misunderstandings relating to the nature or terms of an agreement can mean that the “contract” will be completely void (considered as never having existed), or be voidable (can be declared as not existing);
· If a party is forced to enter into an agreement, consensus is absent and the agreement is void;
· Misrepresentations made by a party renders an agreement voidable, provided the misrepresentation is material in nature.
- What happens when a party does not comply with a valid contract?
This is known as breach of contract. Depending on the circumstances, the innocent party may insist on specific performance by the defaulting party or may cancel the agreement and claim damages. Written agreements (and the law) often prescribe specific procedures to be followed.
- The inherent risk with contracts
In a vibrant economy, things go wrong all the time. We have misunderstandings, people fail to pay their dues, matters beyond our control make it impossible to perform, and business relationships go sour.
Contracts and the interpretation thereof can be extremely complex and wide-ranging and can be affected by an endless list of factors. Contractual relationships carry an inherent risk. The logical approach would be to obtain expert advice and assistance before entering into agreements.
Article compiled by Francois de Kock of Juan Kotze Attorneys, who may be reached at 011 892 1019, francois@therescueshop.co.za or juan@therescueshop.co.za.
