All questions

Contract formation

i The formation of contracts in South African law

In order for a contract to be considered valid and binding in South Africa, certain requirements must be met during the formation of the contract.

Consensus

Consensus must be reached on:

  1. the rights and obligations created by the terms of the contract; and
  2. the parties to the contract.

This consensus must be expressed in an outward manner in the form of an offer and corresponding acceptance.

The requirements for a valid offer as follows:

  1. there must be an intention to be bound by the acceptance;
  2. all the material terms of the contract must be set out in the offer;
  3. the content of the offer cannot be vague; and
  4. the offer must be communicated to the offeree.

In terms of South African law, an offeror may withdraw an offer at any stage prior to acceptance.

The requirements for a valid acceptance are as follows:

  1. there must be an intention to enter into a legally binding contract;
  2. the acceptance must be made by the offeree;
  3. the acceptance of the offer must be unequivocal, otherwise it may amount to a counter-offer;
  4. the acceptance must be communicated to the offeror; and
  5. the acceptance must take place before the offer terminates or expires.
Certainty in respect of material terms

The contract must leave no ambiguity in respect of the material terms, which must be certain and agreed. This is to ensure that each of the parties know exactly what their rights and obligations are.

Capacity

This refers to the ability of a party to understand the nature and effect of the contract. Usually people above the age of 18 are considered to have the capacity to contract.

Legality

In order for a contract to be valid, it may not be contrary to the law. An illegal contract is one that contravenes a statute, the common law or public policy.

Possibility of performance

The contract must be objectively capable of performance at the time of entering into it. If the contract is subjectively impossible (e.g., a specific party cannot perform a specific obligation owing to their personal circumstances) or if it becomes objectively impossible after it has been entered into, there will still be a valid contract at inception.

Formalities, if applicable, must be observed

Certain statutes prescribe formalities in respect of particular types of contracts. In some instances, parties may also include their own formalities.

ii Oral versus written contracts

There is no general requirement in South Africa that a contract must be in writing. Oral contracts are enforceable as long as the requirements for the formation of a valid contract have been met; however, in the case of an oral contract, it is often difficult to prove that the requirements for formation have been met.

The burden rests on the party alleging the existence of the contract to show, on a balance of probabilities, that the contract was formed. South African courts will usually look at the conduct of the parties to establish whether a contract has been formed and what its terms are.

There are certain statutes that require contracts to be in writing to be enforceable, such as the Alienation of Land Act 68 of 1961, which requires all contracts for the sale, donation and exchange of land to be in writing and signed by the parties.

iii Suspensive conditions

A suspensive condition in a contract suspends the coming into existence of the contract until the condition is fulfilled. The contract will not be binding until those formalities have been met or, if possible, waived by the party for whose benefit the condition was inserted.

Once those requirements are met, a binding contract is said to come into existence. A defendant can challenge a contractual claim by alleging that the above elements were not satisfied.

iv Variation of contracts

Under South African law, a party can usually, informally, vary a contract; however, it is common to find non-variation clauses in contracts.

In the case of SA Sentrale Ko-op Graan maatskappy Bpk v. Shifren,2 the then Appellate Division held that a verbal variation of a contract containing a non-variation clause is of no effect.