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UNIT 7 - LEGALITY Cheat Sheet (DRAFT) by

One of the requirements for a valid contract is for the contract to be LEGAL.

This is a draft cheat sheet. It is a work in progress and is not finished yet.

INTROD­UCTION

The distin­ction between void and unenfo­rceable contract:
- a void contract has legal conseq­uences (oblig­ati­ons).
- a unenfo­rceable contract is valid from the beginning but the obliga­tions cannot be enforced if against public policy and illega­lity.
Causes of Illegality
1) statutory illegality
2) common-law illegality
An underlying principle of the law is that agreements seriously entered into should be enforced. (sanctity of contra­ct/­pacta sunt servanda)
Agreements contrary to public policy cannot be enforced.
Public Policy
At its core, public policy is what government bodies (national, provincial & local) decides to do or not to do.
This includes elected officials (presi­dents, mayors, and members of parlia­ment), appointed officials (agency heads) and even courts.
Public policy ensures that private agreements do not harm society, undermine justice or violate consti­tut­ional values.
No matter how two parties freely agree or how clearly they write their contract, a court can step in and declare it void or unenfo­rceable if it goes against public policy.
- Agreements that are contrary to public are illegal and conseq­uently, unenfo­rceable by law.
- The courts are saying: "we value your right to make a contract, but we value the integrity of our legal system and well-being of society more. If your contract threatens that, we will not help enforce it."

EXAMPLES OF ILLEGAL CONTRACTS

(1) Contracts that Waive Fundam­ental Rights
e.g. an employment contract where an employee agrees to work for less than the minimum wage.
(2) Exculp­atory Clauses (Waivers of neglig­ence)
e.g. a landlord trying to waive liability for all injuries caused by their failure to maintain safe premises.
(3) Contracts to Commit an Illegal Acts

PUBLIC INTEREST

Agreements that are contrary to good morals (contra bonos mores) or against public policy?
- it is difficult to determine whether a contract is against good morals or the public interest, because good morals and public policy may differ from time to time and from community to community.
- Sasfin (Pty) Ltd v Beukes 1989 (1) SA 1 (A) is the leading authority on when a court can declare a contract void because it violates public policy.
SASFIN (PTY) LTD V BEUKES
The Parties: the case involved Sasfin, a finance company (the appellant), and Dr. Beukes, a medical specialist and anaest­hetist (the repond­ent).
The Agreem­ents: In February 1985, Dr. Beukes entered into a cession agreement with Sasfin.
Dr. Beukes ceded (trans­ferred) to Sasfin all claims, rights of action, and receiv­ables that were currently due or might become due to him in the future.
The Disputes: a dispute arose when Sasfin claimed Dr. Beukes had breached the discou­nting agreement and owed them money (around R108,000). Sasfin then tried to enforce its rights under the deed of cession to recover the debt by claiming all of Dr. Beukes' future earnings from his practice.
HIGH COURT (Court a quo): Dr. Beukes argued the cession was against public policy. The court agreed and dimissed Sasfin's applic­ation, declaring the deed of cession invalid and unenfo­rce­able. Sasfin's was granted to leave to appeal.
SUPREME COURT OF APPEAL: "­Agr­eements which are clearly inimical of the interest of the community, whether they are contrary to law or morality, or run counter to social or economic expedi­ence, will accord­ingly, on the grounds of public policy not be enforc­ed."­
NB - Sasfin (Pty) Ltd v Beukes stands for the propos­ition that while freedom of contract is a corner­stone of our law, it is not absolute.
  

ILLEGAL CONTRACTS THAT ARE VOID

The interests of the commun­ity­/so­ciety as a whole are of paramount import­ance.
Recognised public interests:
- as far as possible, contra­cting parties should have equal bargaining power.
- volunt­arily concluded contracts should be complied with and enforced.
- the safety of the State should be preserved.
- public service should function properly.
- the full exercise by persons of their legal rights should not be interfered with.
Barkhuizen v Napier:
The correct approach in challe­nging the consti­tut­ional validity of a contra­ctual term is to determine whether the term is contrary to public policy as informed by the consti­tut­ional values - partic­ularly those contained in the Bill of Rights.
The Conclu­sion, Perfor­mance and Object of Contract must be Lawful
Contracts are void because their mere conclusion is contrary to statutory provis­ions, good morals or public policy:
- statutory prohib­itions
- pacta (pactum) succes­soria - (succe­ssion agreement). A contract that aims to regulate how a person's estate will be inherited after their death.
The contract itself bypasses a will entirely and directly determines who will inherit the assets. (Clash with freedom of testation)
- agreements that oust the jurisd­iction of the courts.
BARKHUIZEN V NAPIER
The parties: Mr. Barkhuizen (the insured) entered into a short-term insurance contract with a syndicate of Lloyd's Underw­riters, repres­ented by Mr. Napier (the insurer).
The contract: the policy insured Mr Barkhu­izen's BMW motor vehicle against loss or damge.
The Time-Bar Clause (Clause 5.2.5.): the policy contained a time-l­imi­tation clause which stated: "if we reject liability for any claim made under this Policy we will be released from liability unless summons is served... within 90 days of repudi­ati­on."­
The incident: on 24 November 1999, the vehicle was involved in an accident and damaged beyond repair. Mr Barkhuizen lodged a claim for R181,00 on 2 December 1999.
On 7 January 2000, the insurer repudiated the claim, alleging that the vehicle was being used for business purposes contrary to the policy terms.
Mr Barkhuizen only served summons on the insurer on 8 January 2000, more than two years after the repudi­ation and long after the 90-day period had expired.
Finding: in the High Court, ruled in favour of Mr Barkhu­izen, finding the 90-day time-bar clause uncons­tit­uti­onal.
The SCA, in a unanimous judgement, overturned the High court's decision and upheld the time-bar clause.
ConCourt: fairness, justice and reason­abl­eness cannot be separated from public policy. Public policy takes into account the necessity to do simple justice between indivi­duals, informed by the concept of Ubuntu.

ILLEGAL CONTRACTS THAT ARE VOID

The interests of the commun­ity­/so­ciety as a whole are of paramount import­ance.
Recognised public interests:
- as far as possible, contra­cting parties should have equal bargaining power.
- volunt­arily concluded contracts should be complied with and enforced.
- the safety of the State should be preserved.
- public service should function properly.
- the full exercise by persons of their legal rights should not be interfered with.
Barkhuizen v Napier:
The correct approach in challe­nging the consti­tut­ional validity of a contra­ctual term is to determine whether the term is contrary to public policy as informed by the consti­tut­ional values - partic­ularly those contained in the Bill of Rights.
The Conclu­sion, Perfor­mance and Object of Contract must be Lawful
Contracts are void because their mere conclusion is contrary to statutory provis­ions, good morals or public policy:
- statutory prohib­itions
- pacta (pactum) succes­soria - (succe­ssion agreement). A contract that aims to regulate how a person's estate will be inherited after their death.
The contract itself bypasses a will entirely and directly determines who will inherit the assets. (Clash with freedom of testation)
- agreements that oust the jurisd­iction of the courts.
Perfor­mance in contracts must be legal:
- contra­cting with a party to commit a crime (robbery, kidnap­ping, murder) or a DELICT.
- where contract can be carried out in a lawful and unlawful manner: presum­ption is that it was intended to be carried out in a lawful manner.
The purpose and object of the contract must be lawful.
Examples of Illegal or Invalid Contracts
(A) Contracts against good morals:
- good morals refer to good behaviour in community.
- Immoral and sexually repreh­ensible conduct: an agreement to pay a 'prost­itute' for sexual interc­ourse or insurance of a brothel.
Maseko v Maseko
- plaintiff in order to protect her house against possible attachment by one of her creditors, agreed to marry the defendent, transfer the house into his name and thereafter divorced.
- the defendent undertook to re-tra­nsfer the house after the threat of attachment was over.
- the plaintiff was never insolvent at any stage, but the court held that the agreement was illegal on 3 grounds:
(1) it was morally repreh­ensible because; it was designed to mislead potential or existing creditors as to the plaint­iff's worth;
(2) perpet­uated fraud against the court in divorce procee­dings.
(3) perpet­uated fraud against the court in divorce procee­dings.
- court remarked that the first ground was both immoral and against public policy (inter­action)
(B) Statutory Illega­lity:
Statute may prohibit certain types of agreements or the inclusion of certain provisions in an agreement.
Conseq­uently, such agreements or provisions in an agreement will not have any legal force.
Contracts aimed at circum­venting statute are illegal and thus void.
s90 of the National Credit Act (NCA): Certain clauses in a credit agreement are illegal and there are remedies available.
- sever the unlawful contra­ctual provision from the agreement;
- alter the agreement to render it lawful; or
- declare the agreement entirely unlawful
s51 of the Consumer Protection Act: prohibits a number of clauses in consumer contracts.
What if the statute does not expressly stipulate that a contract or contra­ctual provision of a certain nature is void? Then it ought to be determined whether the legisl­ature impliedly intended the nature of an agreement or provision to be void... HOW?
Gambling and wagering
- s16(1) of the National Gambling Act: bets arising from unlawful gambling activities are unenfo­rceable and does not expressly state that wagering contracts are void.
- looking at the overall intention of the legisl­ature, it seems it is implied that wagering contracts arising from unlawful gambling activities are void.
- e.g. wagering contract - Betway (sports betting)
(C) Pacta de quota litis, Champerty and Mainte­nance:
These 3 terms are closely related concepts that lie at the inters­ection of contract law, legal ethics, and public policy.
They deal with the question of who can fund or profit from litigation and under what circum­sta­nces.
Pacta de quota litis
It is an agreement between lawyer and their client, made before the conclusion of the case, in which the lawyer's fee is set exclus­ively as a percentage of the proceeds from the lawsuit.
Key charac­ter­istics:
(1) the lawyer's right to payment depends entirely on the outcome (pure contin­gency fee).
(2) the fee is calculated as a percentage of what the client recovers
(3) if the case is lost, the lawyer receives nothing.
(4) the client owes nothing for the lawyer's services unless they win.
Mainte­nance
It is when a 3rd party with no legitimate interest in a case improperly provides financial or other support to help one party prosecute or defend a lawsuit.
Key Charac­ter­istics:
(1) a 3rd party (the "­mai­nta­ine­r") provides support
(2) the maintainer has no illegi­timate interest in the case
(3) the support enables the litigation to proceed
(4) unlike champerty, the maintainer does not necess­arily expect a share of the proceeds.
(D) Unfair Contracts:
Contracts must be fair, reasonable & just to the parties.
The unfairness and unreas­ona­bleness of the contract towards one of the parties and the interest they seeks... are taken into account.
Barkhuizen v Napier 2007 (5) SA 323 (CC) is the leading Consti­tut­ional Court case on the interface between consti­tut­ional rights (parti­cularly the right of access to courts) and the common law of contract.
- it establ­ishes the framework for determ­ining when a contra­ctual term is unenfo­rceable because it violates public policy, as informed by the Consti­tution.
 

CONSUMER PROTECTION ACT 68 OF 2008

S48(1)(a) prohibits a supplier from offering goods or services at an unreas­onable price or on terms that are unfair, unjust and unreas­onable.
S48(2) gives examples of prohibited agreements and terms.
If a court finds that a contract is uncons­cio­nable, unjust, unreas­onable or unfair, it may order that the money or goods be returned to the consumer or that the consumer be compen­sated his or her losses, expenses, and court procee­dings.
 

CONSEQ­UENCES OF A CONTRACT THAT IS VOID

- illegal contracts cannot be enforced as they create no obliga­tions.
- if illegality only affects a part of the contract: the illegal part be severed from the rest of the contract in certain circum­sta­nces.
- where parties performed in terms of a void contract: perfor­mance cannot be claim back where the parties are equally guilty, unless the court allows them.
Contract cannot be enforced (ex turpi rule):
"From a dishon­orable cause, no action arises."
- illegal contracts create no rights and obliga­tions and thus cannot be enforced.
- if a party suffers damage as a result of an illegal contract, they cannot claim contra­ctual damages from the other party (ex turpi rule).
- rule cannot be relaxed by the courts under any circum­stances and there are no exceptions to the rule.
- perfor­mance by either party to the contract does not make the agreement legal.
Severing the Illegal Part of a contract:
- sometimes a contract can be partially illegal.
- courts have in certain instances allowed the illegal parts to be severed from the rest, thus permitting the remainder of the agreement to remain in force.
- in some instances the courts have refused: public policy required the entire contract to be declared void.
Whether or not an illegal part is severable from the rest of the agreement depends on the intention of the parties: see Benlou Properties (Pty) Ltd v Vector Graphics (Pty) Ltd:
- illegal part of the contract is gramma­tically or notionally distinct from the rest of the agreement? e.g. illegal part form an indepe­ndent clause of the contra­ct...
- illegal part subsidiary or collateral to the main purpose of the contract, so if that it is removed, the substa­ntive character of the contract remains unchanged
- would the parties have entered into the contract without the illegal part?
- All answered in the affirm­ative? The severa­bility is possible.
Reclaiming perfor­mance that has been made in terms of an illegal contract (par delictum rule)
In principle, restit­ution of what has been performed must be granted.
ownership of perfor­mance not passed: reclaim perfor­mance through rei vindicatio
ownership of perfor­mance passed: unjust­ified enrichment
par delictum rule: parties are equally morally guilty, the one in a stronger position will prevent restit­ution from taking place.
Rules based on Public Policy Consid­era­tions:
- court must not assist those who approach it with 'unclean hands'
- unlawful contracts should be discou­raged
Rule can be relaxed due to Public Policy Consid­era­tions:
e.g. if the rule indirectly enforces an illegal contract, defendent will be enriched at the expense of the plaintiff, etc.

EXTRA

ILLEGAL CONTRACTS THAT ARE 'VALID' BUT UNENFO­RCEABLE
- wagering and gambling contracts
- agreements in restraint of trade