LAW OF CONTRACT 2023

LEARNING UNIT 3: REQUIREMENTS OF A VALID CONTRACT

THEME 2: FORMALITIES CHAPTER 6
 LEARNING OUTCOMES
LO5: Distinguish between the two broad categories of formalities;

LO6: Differentiate between the three types of formalities required by statute and provide
examples of each;

LO7: Discuss what happens to a contract which is non-compliant with statutory formalities;

LO8: Explain why parties impose their own formalities onto a contract;

LO9: Apply the principles of case law to the most commonly found self-imposed formalities;

LO10: Explain the exceptions to the developments surrounding non-variation clauses, non-
cancellation and non-waiver clauses.
 LO 5: 2 BROAD CATEGORIES OF FORMALITIES
• GENERAL RULE: no formalities required for formation of contract
• Provided all other requirements are met, parties may express their intentions as they wish

2 EXCEPTIONS TO GENERAL RULE:

1. FORMALITIES PRESCRIBED BY LAW: CERTAIN TYPES OF CONTRACT: LAW REQUIRES PARTIES TO EXPRESS THEIR INTENTION
IN A PRESCRIBED FORMAL WAY i.e. writing, notoriety, registration.
2. FORMALITIES PRESCRIBED BY PARTIES: PARTIES MAY AGREE THAT THE CONTRACT WILL BE BINDING ON THEM ONLY WHEN
CERTAIN FORMALITIES HAVE BEEN OBSERVED. – Agreement reduced to writing & signed by both parties. Also maybe
variation clauses, Cancellation clauses etc.

• Important contracts should be in writing – proof of existence & terms. Party who wishes to enforce contract bears the onus to
prove.
• Without a written record, may be very difficult to establish contracts existence.

• PG 172 T/B – 6.1

 LO 6&7: FORMALITIES PRESCRIBED BY LAW
• Various law require certain types of contract should comply with prescribed formalities
• Usually require contract to be in writing and signed by parties
• Sometime to be notarised & registered for it to be effective
• Also applies to electronic contracts
Examples:
➢ All material terms must be in writing –not just essentialia
➢ Terms implied by law [naturalia] & tacit terms don’t need to be in writing
➢ Terms don’t need to be in one document
➢ Any variation to material terms has to be in writing
➢ Sometimes 1 party mislead the other by agreeing to oral variations of the contract only later to rely on formal invalidity of the
variation –Estoppel may not succeed here.
➢ If formalities are not complied with – contract is void. Any performance in terms of a void contract may be recovered with one
of the enrichment actions recognised by our law. • PG 172 T/B – 6.2
PRESCRIBED
FORMALITIES REQUIRED
PRESCRIBED
FORMALITIES
FOR ENFORCEMENT
REQUIRED FOR AGAINST THIRD PARTIES
VALIDITY

ALIENATION OF LAND SURETYSHIP DONATION ANC LONG LEASE OF LAND

LO 6&7: FORMALITIES PRESCRIBED BY LAW contd…
PRESCRIBED FORMALITIES REQUIRED FOR
• The law requires certain contracts to be in writing & signed by parties to be valid.
VALIDITY • Failure to adhere to prescribed formalities will render contract void.

• S2[1] of Alienation of Land Act: “No alienation of land after commencement

of this section shall…be of any force or effect unless it is contained in a deed of
1. ALIENATION OF LAND alienation signed by the parties thereto or by their agents acting on their
written authority”
• Purpose is t promote legal certainty regarding authenticity of contracts –
limiting litigation & preventing malpractice i.e. fraud
• If signing on behalf of a party, must be authorised in writing by that party
• S 2 does not apply to sale of land by auction

• Surety undertakes to creditor of the principal debtor –If principal debtor fails
2. SURETYSHIP to perform the principal obligation, surety will perform it – failing that will
indemnify creditor.
• S 6 General Law Amendment Act – no suretyship entered into after 22 June
1956 is valid unless signed by surety.
• Creditor need not sign
• Must bring terms of the contract to the awareness of surety.
 LO 6&7: FORMALITIES PRESCRIBED BY LAW contd…
• S 5 General Law Amendment Act –no contract of donation entered into after 22
3. DONATION June 1956 will be valid unless the written document signed by the donor/agent
under written authority granted in the presence of 2 witnesses.
• The deed of donation does not need to be witnessed
• Donee has to accept the offer but need not sign the contract
Executory Donation: not yet been carried out –not been completed by delivery of
promised benefit.
• Some formalities are not requirements for validity
PRESCRIBED
FORMALITIES REQUIRED • But some parties may not be able to depend on the contract or enforce against 3rd
FOR ENFORCEMENT parties unless certain formalities have been observed.
AGAINST THIRD PARTIES • Such formalities are observed to give notice to 3rd parties.
• Valid between parties – must be notarised & registered within 3 months before
marriage for it to be enforceable against 3rd parties.
ANC • Notarial Execution – conclusion of contract in writing before notary – notary
signs, seals it and places a copy in his protocol
• S 1Formalities in respect of Leases of Land Act – oral lease of land is invalid
• Long term lease of land will only effect against a creditor – period longer than 10
LONG LEASE OF LAND
years after having been entered into if registered against title deed of leased land.
– 3rd parties will be bound.
LO 6&7: FORMALITIES PRESCRIBED BY LAW contd…
FORMALITIES IN ELECTRONIC CONTRACTS • PG 175 T/B – 6.2.3

• S 12 Electronic Communications & transactions Act – requirement that document/information be in writing if it is in the
form of a data message & is accessible.
• Does not apply to alienation of land & long term leases of land over 20 years
• Applies to suretyships & executory donations
• Should apply to formalities required by law and required by parties and should apply to variation of contract.

• S 13[2] – electronic signature can serve as equivalent of ‘wet’ signature

• Electronic signature – variety of forms – depends on nature of transaction i.e. persons name in writing, biometric
identification technology
• Signature required by law without specification of type – can use an advanced electronic signature

ADVANCED ELECTRONIC SIGNATURE: electronic signature resulting from a process that has been accredited by the Director
General of Department of Communications acting as Accreditation Authority.
 LO 8: FORMALITIES STIPULATED BY PARTIES
• Parties can prescribe own formalities for creation, variation or cancellation of contract
• Neither can deviate from these formalities unilaterally. • PG 177 T/B – 6.3

CREATION OF CONTRACT:
Parties to oral agreement – may insist that it should be reduced to writing & signed
Can be one of 2 purposes: 1. written record of agreement [proof] –Agreement is binding even if not reduced to writing
2. Parties can intend that Oral Agreement is not binding upon them until reduced to writing &
signed i.e. Oral Agreement lacks contractual force –will only become a contract until
formalities are adhered to.

• Which purpose parties intend is a matter of fact

• Contrary to any evidence – law presumes that their intention was to get proof of agreement
• Party who alleges otherwise [i.e. writing was a formality] –must prove it.
Case: Goldblatt vs Fremantle – no contract existed because parties intended agreement to be in writing which also involved
signing. • PG 177 T/B – 6.3.1 – De Bruin v Brink
• Intention of parties to ‘writing’ – is decisive.
• If no evidence of the intention – an electronic contract which complies with S 12 of Electronic Communications &
transactions Act should usually comply with formality of writing.
• if intention was to reduce to writing to have a binding contract – they can change minds and do away with requirement of
writing – Oral Agreement will prevail.
 LO 8: FORMALITIES STIPULATED BY PARTIES contd…
VARIATION OF CONTRACT: NON-VARIATION CLAUSE & SHIFREN PRINCIPLE • PG 178 T/B – 6.3.2

• Parties can prescribe formalities for variation

• Common practice to insert NON-VARIATION CLAUSE in written contract i.e. NO VARIATION OF THIS AGREEMENT SHALL BE OF
ANY FORCE OR EFFECT UNLESS REDUCED TO WRITING AND SIGNED BY THE PARTIES TO THIS AGREEMENT
• Before there was doubt whether parties could restrict freedom to amend contract orally but the doubts were addressed in
the Case of SA Sentrale Ko-operatiewe Graanmaatskappy vs Shifren.
Held: Non-Variation clause was not against public policy and that oral variation of contract was effective if the clause barred oral
variation.
Purpose of clause: to prevent dispute between parties & problems of proof that might arise if oral variations were permitted.
• Giving effect to clause was in line with pacta sunt servanda : agreements are freely and seriously entered into must be
enforced in public interest.
• By inserting Non-Variation clause, parties had limited their power to alter contract by binding themselves to a formal
procedure for variation.
Shifren Principle: Clause does not deprive them of freedom of contract since they could still vary the contract but subject to
formalities which they had agreed upon.
• The principle can produce results which appear to be unjust – Courts have tried to soften or avoid the principle by relying on
estoppel, waiver, pacta de non petendo & good faith.
 LO 8: FORMALITIES STIPULATED BY PARTIES contd…

CANCELLATION OF CONTRACT: NON-CANCELLATION CLAUSES • PG 180 T/B – 6.3.3

GENERAL RULE: parties are free to cancel at any time by agreement

Case: Impala Distributors vs Taunus Chemical Manufacturing Co. - Because parties can agree on formalities to create and vary
contracts – should also be able to prescribe formalities to cancel.
• Standard practice to insert in a written contract a NON-CANCELLATION CLAUSE – prescribe formalities for cancellation.
• Interpreted restrictively – applies to consensual cancellation – mutual consent
• It does not prevent a party from cancelling unilaterally because of breach by the other party
• Impala case – Non-cancellation clause stated: “THIS AGREEMENT MAY BE TERMINATED BY MUTUAL CONSENT IN WRITING
OF THE PARTIES”
• HELD: Had it not been for the Non-Variation clause, parties would have been free to vary non-cancellation informally by
dropping requirement of writing. The inclusion of the Non-variation clause – had effect of entrenching both the non-variation
and non-cancellation clauses against oral variation.
• To be effective – non-cancellation clause must be coupled with non-variation clause
• Present wording: “NO VARIATION OR CONSENSUAL CANCELLATION OF THIS CONTRACT SHALL BE OF ANY FORCE OR EFFECT
UNLESS REDDUCED TO WRITING & SIGNED BY THE PARTIES”
 LO 9: LIMITATION OF SHIFREN PRINCIPLE
Shifren Principle: Clause does not deprive them of freedom of contract since they could still vary the contract but subject to
formalities which they had agreed upon.

• Application of Shifren Principle may lead to unsatisfactory consequences.

• Courts have attempted to limit this principle

e.g. lessor and lessee orally agree to reduce rent from R 3500 to R3000 per month
- even though there is a non-variation clause in the agreement
- the lessee reminds the lessor of the non-variation clause
- the lessor promises the lessee of the need to reduce the variation to writing
- but the lessor tells the lessee that he regards himself as being bound to that agreement
- this contract also contains a clause providing that the lessor may cancel the contract for breach by the lessee (including for failure to
pay the full amount of rent due)
- the lessor accepts the reduced rent for 4 months but on the 5th month the lessor cancels the contract without any warning and
claims the full amount as well R2000 for arrear rental for the previous 4 months
- this would obviously result in unconscionable conduct
- in these situations the court must limit the application of the SHIFREN principle
 LO 9: LIMITATION OF SHIFREN PRINCIPLE contd…
RESTRICTIVE INTERPRETATION

• Non-variation clause must be interpreted restrictively because it limits parties’ freedom to contract.
• Whether the clause protects itself against oral variation is open to interpretation.
• Non-variation clause only prescribes formalities for variation
• Variation is bilateral, consensual – parties change terms of contract
• Any legal act that does not amount to a variation will not be affected by non-variation clause.
SELF STUDY – T/B –PG 180- 182 – RESTRICTIVE INTERPRETATION

WHERE THE ENFORCEMENT WOULD BE AGAINST PUBLIC POLICY • PG 182 T/B – 6.3.4.2
• non variation clauses will not be valid or enforced if it is against public policy
- examples:
- fraud
- creditor acts in bad faith
- if enforcement will be unfair
• in the case of BRISLEY V DROTSKY, lessor accepted late payment of the rent by the lessee for 5 months in terms of an oral
agreement.
• the lessor exercised a contractual clause that allowed him to cancel the contract for late payment
• the court found that the lessee’s case fell short of the requirement of exceptional unfairness
• the court will not enforce a non-variation agreement if it against constitutional values
 LO 9: LIMITATION OF SHIFREN PRINCIPLE contd…
WHERE THE PARTY IS ESTOPPED FROM ENFORCING A NON-VARIATION CLAUSE

• there is a possibility to use estoppel as a defence

• no case law
- SELF STUDY – T/B –PG 184 – 6.3.4.3

LO 10: EXCEPTIONS: NON-VARIATION, NON-

CANCELLATION, NON-WAIVER
NON-WAIVER CLAUSE • PG 185 T/B – 6.3.5

• waiver may be a way to escape the strict approach in the SHIFREN case
• but now parties may also include a non-waiver clause into their agreements
• these clauses have become standard
• if they all present it becomes more difficult to rely on oral statements

SEE DIAGRM ON PG 185 T/B