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LEGAL PRACTICE AND PRACTICAL IMPLICATIONS

PRE-READING NS CORE APP
WORKSHOP 1, DAY 1
SOUTH AFRICAN LAW

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©Actuarial Society of South Africa

The copyright to these materials belongs to the Actuarial Society of South Africa. No part of these
materials may be copied or reproduced in electronic format or otherwise, except with the written
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in terms of the Copyright Act 98 of 1978 for any contravention of the copyright that it holds in these
materials.

Fourth edition March 2022.

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PREFACE

F or most people, law is a mystery, concerned mainly with the doings of the wicked. Their knowledge
of the law derives from what they read in sensationalistic newspaper articles, magazines, or from what
they see in the movies, or in some television drama. It is thus little wonder that for the majority of
people the law seems to be concerned with unfortunate souls who have got themselves into a pickle of sorts,
such as divorce, murder, motor-vehicle accidents, etc. But law is more pervasive than that. It governs each
and every aspect of the ordinary law-abiding and peace-loving person’s life. As one writer comments:

‘During every hour of the day “in the dealings with one another”, as Plato puts it, millions upon millions of legal
obligations “spring up”, become binding, and are discharged… As you proceed along the street you are caught up in the
constant swirl of emergent rights and duties that arise between motorist and pedestrian and all who use the street. In
the shops and exchanges [people] become buyers and sellers by the million at every minute of the day. They pay, they
borrow, and they bank in a veritable tangle of legal relationships. Indeed anyone who has to do with anyone else or with
any group or organization of people, is enmeshed in this legal network; and every single relationship has a dual aspect;
it is a relationship between the parties and it is a relationship also between them and society as a whole. In short it is part
and parcel of this immense network which is a coherent whole and inextricably bound together. [People] are involved
in it all, willy-nilly and whether they are babes or lunatics, whether they understand their position or whether they have
not the slightest glimmering of it.’1

So, whether you buy sweets in a shop; rent a flat; buy a house; enter into a marriage; book a holiday; borrow
a book from the local library; or enter into employment, there is a legal transaction giving rise to rights and
duties.
The simplest things can give rise to legal consequences. Take for example Donoghue v Stevenson
[1932] AC 562, an English case dating back to the 1930s, made famous by its peculiar facts. Mrs
Case
Donoghue’s friend bought her a drink of ginger beer at a tearoom. A bottle made of dark
illustration
opaque glass was brought to her by a waiter, together with a tumbler. She poured some of the
contents into the tumbler and drank the contents. She then poured some more ginger beer into the
tumbler only to make a startling find. As she poured out the balance from the bottle, a decomposing snail
floated out of it. Mrs Donoghue suffered a shock and gastro-enteritis. She sued the manufacturer for
damages on the ground of negligence. The House of Lords (the highest court in England) found in her
favour.
Of course, not all cases are as outlandish as that of Donoghue, but you get the picture: law is pervasive
and the most mundane circumstances can have legal implications.
In these notes, some aspects of the South African legal system will be discussed which will be of
relevance to you as an actuary practising in South Africa. The object is to give you a basic working knowledge
of legal principles – nothing too intricate. In particular, the notes will cover:
• The law of contract
• The law of delict
• Forms of business enterprises. To this extent, we will consider the juridical nature of a sole
proprietorship, a partnership, a company, a close corporation and a trust
To make the information contained herein easily digestible, case studies and factual examples will be utilised
where this is possible. For the sake of completeness, information will be referenced by citing statutes, cases,
textbooks, journal articles, etc. However, for your purposes there is no need to consult any of these
references, unless you feel the need to, or you find that a particular subject area tickles your interest.
Prior to discussing the subject areas mentioned above, something must be said about the
methodology of the South African legal system. You need to know where our law comes from (i.e. the

1
G Findlay ‘The Sources of Law’ (1948) 65 SALJ 497 at 505-6.

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sources of law), the structure of our court system, and about the branches of law. This background
information will assist you immensely to better understand the substantive law.

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CHAPTER ONE
INTRODUCTION TO THE SOUTH AFRICAN LEGAL SYSTEM
A. SOURCES OF LAW, THE HIERARCHY OF COURTS AND THE PRACTICAL
OPERATION OF THE DOCTRINE OF PRECEDENT

S
ince South African law is not codified (i.e. it is not contained in one book as is the case in Germany
where they have the German Civil Code or in the Netherlands where they have the Dutch Civil Code),
when a South African lawyer wants to find the law he or she turns to several possible sources:
(a) The Constitution of the Republic of South Africa of 1996
(b) Legislation
(c) Judicial Precedent
(d) Roman-Dutch Law
(e) African Customary Law
(f) Custom
It is axiomatic, therefore, that for someone untrained in the law, finding the law can be daunting, if
not an impossible task.
All of the above sources of law constitute binding sources of law. This means that every court in the
land and every person who enters into a transaction must comply with what is contained in these sources,
for this is the law. The views of academic writers and statements by courts which do not constitute precedent
(in contradistinction to statements of court which do constitute precedent) are simply persuasive. A court
is free to refer to persuasive sources when deliberating a matter, but is not obliged to follow them. When you
read a law textbook, you will note that it contains a lot of references. Some of the references refer to binding
sources and others refer to persuasive sources when discussing a particular legal issue.

(a) The Constitution

The Constitution of the Republic of South Africa of 1996 is the supreme law of South Africa. Section 2 of
the Constitution provides:

‘This Constitution is the supreme law of the Republic; law or conduct inconsistent with it is invalid, and the obligations
imposed by it must be fulfilled.’

Although the Constitution is a legislative enactment of Parliament, it was not created in the ordinary
way. For the duration of the drafting of the Constitution, Parliament sat in a unique capacity as the
Constitutional Assembly. The Constitutional Assembly deliberated for two years on the text of the
Constitution and once the draft text was completed, it was certified by the Constitutional Court.
The South African Constitution is considered to be one of the most progressive and, perhaps, the
best articulated constitutions in the world. It consists of 243 provisions contained in 14 chapters. However,
the most important for each of us is Chapter 2, the Bill of Rights. In line with many international human
rights instruments, the Bill of Rights entrenches 27 rights which can broadly be classified as ‘civil and
political’ rights and ‘socio-economic’ rights.
Examples of civil and political rights:
• Equality
• Dignity
• Life
• Freedom and security of the person

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• Privacy
• Freedom of expression
• Freedom of association
• Fair trial
Examples of socio-economic rights:
• Education
• Housing
• Health care
• Food
• Water
• Social Security.
What is important to note about the Constitution and indeed, the Bill of Rights, is that it binds all
spheres of government (national, provincial and local government), the executive and the judiciary. The Bill
of Rights has both vertical and horizontal application. It is the latter characteristic that is of particular
relevance to us as individuals.
If you referred to the constitutions of the world and had a look at their respective Bills of Rights you
would find that the overwhelming majority of them are binding between the state and the individual only
(i.e. the Bill of Rights has vertical application). What this means is that the state, in particular, cannot
perform any act (such as make an executive decision or pass a law) that will violate the provisions of the
constitution. If the state did so, its act would be susceptible to a constitutional challenge in court. However,
the South African Constitution, being one of the more progressive of the world’s constitutions, entrenches
a horizontal application of its Bill of Rights. This means that the Bill of Rights is, as far as is practicable,
binding also between citizen and citizen. Thus if two individuals, for example, drafted a contract in terms of
which one of them discriminated against the other on some or other ground such as race, ethnicity, sexual
orientation or colour, and there is no justifiable basis for such discrimination, that contract could be set aside
for being offensive to the values of the Constitution. Consequently, it is imperative for people when entering
into legal transactions to reflect on whether their transaction offends the spirit, the objects and the purport
of the Constitution and by implication, the Bill of Rights.
To illustrate the point more clearly, let us consider the case of Minister of Education v Syfrets Trust
2006 (4) SA 205 (C), a decision of the Cape High Court. In this case a deceased testator drafted a will in
1920 in terms of which he left a bequest for the creation of a bursary fund in favour of students Case
of the University of Cape Town. In the will the testator stipulated that the recipients of the illustration
bursary had to be ‘of European descent, male and gentile.’ In 1969 the University of Cape
Town refused to administer the bursary because it felt that the bursary offended the moral convictions of
the University and the duty thus fell to Syfrets, an investment company, to administer the bursary fund.
However, in 2002 the Minister of Education challenged the validity of the will after an advertisement
appeared in the newspaper calling for suitable candidates to apply. The court held that although freedom of
testation is a cornerstone principle in our law, it is not sacrosanct.2 It is widely accepted, said the court, that
a clause in a will that is against public policy can be struck out or amended as required.3 Contemporary values
of public policy, held the court, were informed by the aspirational values of the Constitution.4 The
Constitution envisages a South Africa that is non-racist, non-sexist and that respects the cultural and
religious diversity of its people. The condition in question violated the equality clause in the Bill of Rights
because it discriminated against people on the grounds of race, colour, sex and religion – all of which are

2
At 217 para [22].
3
At 218 para [23].
4
At 218 para [24].

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enumerated grounds of discrimination (i.e. specifically mentioned in section 9 - the equality clause5 - of the
Constitution). This, held the court, made the condition prima facie contrary to prevailing notions of public
policy.6 The court then went on to consider whether the discrimination was nevertheless objectively
justifiable. To this extent, the court considered the purpose of the bequest and whether that purpose could
be best realised by having the stipulation in the will.7 This part of the judgment is aptly termed the
‘limitations analysis’, which is built into the equality clause and is also generally and more sophisticatedly
entrenched in section 36 of the Constitution, the limitations clause.8 After applying the limitations analysis,
the court held that the condition in question served no useful purpose other than to exclude certain
categories of persons from reaping the benefits of the bursary fund. Accordingly, the court declared the
clause to be against public policy.9 The court ruled that the phrase ‘European, male and gentile’ should be
treated pro non scripto (i.e as if never written) and that everyone irrespective of race, colour, sex or religion
was entitled to apply for the bursary.10
This case illustrates several things: (a) the horizontal application of the Bill of Rights; (b)
contemporary values of public policy should be determined in accordance with the normative aspirational
values of the Constitution; (c) not every condition which is prima facie discriminatory is unconstitutional
(one must also find that the discrimination cannot be justified because it serves no objectively identifiable
rational purpose); and (d) one determines public policy not at the time when the transaction giving rise to
litigation is entered into, but at the time when the transaction is sought to be enforced. This latter point is
important, because it has ramifications for the law of contract as well. Should a contract be drafted for future
performance, a party is always at liberty to challenge the contract when performance in terms of the contract
is due.

5
Section 9 provides as follows:
1. 'Everyone is equal before the law and has the right to equal protection and benefit of the law.
2. Equality includes the full and equal enjoyment of all rights and freedoms. To promote the achievement of
equality, legislative and other measures designed to protect or advance persons, or categories of persons,
disadvantaged by unfair discrimination may be taken.
3. The state may not unfairly discriminate directly or indirectly against anyone on one or more grounds, including
race, gender, sex, pregnancy, marital status, ethnic or social origin, colour, sexual orientation, age, disability,
religion, conscience, belief, culture, language and birth.
4. No person may unfairly discriminate directly or indirectly against anyone on one or more grounds in terms of
subsection (3). National legislation must be enacted to prevent or prohibit unfair discrimination.
5. Discrimination on one or more of the grounds listed in subsection (3) is unfair unless it is established that the
discrimination is fair.’

6
At 221 para [32].
7
At 223 para [34].
8
Section 36 of the Constitution provides:
1. ‘The rights in the Bill of Rights may be limited only in terms of law of general application to the extent that
the limitation is reasonable and justifiable in an open and democratic society based on human dignity,
equality and freedom, taking into account all relevant factors, including-
a. the nature of the right;
b. the importance of the purpose of the limitation;
c. the nature and extent of the limitation;
d. the relation between the limitation and its purpose; and
e. less restrictive means to achieve the purpose.
2. Except as provided in subsection (1) or in any other provision of the Constitution, no law may limit any
right entrenched in the Bill of Rights.’

9
At 223 para [34].
10
At 229 para [49].

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(b) Legislation

There are thousands of pieces of legislation in force in South Africa. They govern virtually every aspect of
life. In terms of the Constitution, Parliament makes legislation for the whole country, provincial legislatures
make legislation for the various provinces and municipal councils make legislation for their ward areas.
Each of these different legislative structures has their own legislative competence, which is also
governed by the Constitution. Since the legislative competence of each law making body is quite a
complicated subject, and because it is irrelevant for our purposes, no more will be said of this.
When Parliament and a provincial legislature make legislation, it is called an ‘Act’ and when a
municipality passes legislation it is called an ‘ordinance’ or a ‘by-law.’ An Act of Parliament is effective
throughout the entire country, whereas a provincial Act or a by-law is only effective in the province or
municipality in which it is made.
Sometimes legislation authorises a particular person mentioned in that legislation to make further
laws. This is called ‘delegated legislation’ and again the extent to which the delegated legislation is effective
throughout the country depends on the kind of legislation one is working with.
To illustrate the above, let us consider the Tobacco Products Control Act 83 of 1993. This Act was
passed by Parliament. Because it was enacted by the national legislature, it governs all the people of South
Africa. In terms of the Act, the Minister of Health may make regulations to determine the preconditions
under which people may smoke in public places.11 The regulations of the Minister constitute delegated
legislation. Since the Minister makes regulations in terms of an Act which applies nationally, the regulations
of the Minister also have national application. So whether you wish to open a restaurant in Cape Town or
in Springbok, you will have to comply with the regulations passed by the Minster setting out the
circumstances under which people will be permitted to smoke in your restaurant.
The courts must enforce legislation, unless the legislation in question is unconstitutional for
whatever reason. Remember the Constitution is the supreme law and all law and conduct inconsistent with
it is unconstitutional and invalid.
Most disputes involving legislation turn on questions of interpretation. Nowhere is this more
evident than in the area of tax legislation. Each year, in many cases, courts are required to interpret tax
legislation because the legislature has drafted the legislation in such a way so as to render it capable of more
than one interpretation. The courts are required, in those cases, to determine the probable intention of the
legislature. To assist them to do so, the courts refer to a body of law dealing with statutory interpretation. If
Parliament does not agree with the interpretation given to legislation by the courts, Parliament is at liberty
to amend the legislation. Statutory interpretation is a distinct branch of law. Fortunately for you, there is no
need to go into it.
If people enter into transactions in contravention of legislation, such transactions are unenforceable.
It is thus very important to have a working knowledge of the legislation that governs your profession or
legislation pertaining to the transactions that you regularly enter into.

(c) Judicial Precedent

This is the third most important source of law. When people talk about the common law of South Africa,
what they are actually referring to is judicial precedent and Roman-Dutch law (the fourth source of law,
discussed below).
When a court makes a decision interpreting legislation or the Constitution, that interpretation
constitutes judicial precedent and people must follow the decision of the court if a similar problem arises in
the future. Furthermore, there is a significant portion of our law which is not codified in legislation, for

11
See section 6 of the Act.

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example, the principles of the law of contract and the law of delict, to name but two areas of law. Lawyers
derive the binding principles of contract and delict from judicial precedent.
When a judge is confronted with a legal problem for which there is no legislation, the judge applies
his or her mind to that problem by looking for direction in Roman-Dutch law (which is part of the common
law of South Africa). If the court finds an answer or a near-answer in Roman-Dutch law, the court looks to
see if Roman-Dutch law will be applicable in modern South African law. If the court finds that it is applicable,
the court will apply the Roman-Dutch answer. If Roman-Dutch law presents no answer, the court refers to
the laws of other countries to see how they deal with similar issues and if the court finds what it deems to be
a ‘good answer’ in foreign jurisdictions, the court will develop our common law by incorporating foreign law
into South African law.
To illustrate the above discussion take the following examples. In Ex parte Boedel Steenkamp 1962
(3) SA 954 (O), the court was asked to consider whether a foetus could inherit an
Case
unconditional inheritance from its father if its father died before it was born. This question
illustration
was of relevance because it is a general principle of our law that a person can only inherit if
he is alive at the time of the devolution of a benefit. Since unconditional benefits generally devolve
when a testator dies, the general rule is that the heir should be alive at the time of the deceased’s death. The
court in Steenkamp, after surveying Roman-Dutch law, found that a principle existed in Roman-Dutch law
permitting unborn foetuses to be deemed alive for the purposes of inheritance.12 Since there was no reason
in law or on grounds of policy why the same principle could not apply in modern South African law, the
court held in favour of the reception of the principle. In rendering this decision, the court created a principle
of law, subsequently followed by every court in the land, because the decision was considered correct and in
accordance with prevailing notions of justice and equity.
In contradistinction to Boedel Steenkamp, in Pinchin and Another NO v Santam Insurance
Co Ltd 1963 (2) SA 254 (W) a question came before our courts for which there was no Case
answer in Roman-Dutch law. In this case a child was born with cerebral palsy. The parents illustration
alleged that the child suffered this condition because the child’s mother was involved in a car
accident with a defendant who drove his car negligently while she was pregnant. The question before the
court was: could one bring a delictual action13 for injuries suffered by a child whilst still in the womb of its
mother?14 Since no answer could be found in Roman-Dutch law, the court turned to continental European
legal systems and North American law and found that such claims were recognised in those legal systems.15
Since there was nothing inimical to the recognition of such a principle in our law, the court saw no reason
why the principle could not be extended to our legal system. Consequently, it allowed the claim. In so doing,
a new principle of law became firmly entrenched to form part of our common law.
Since judicial precedent is lower in the hierarchy of sources of law, it is always open to the legislature
to override judicial precedent with legislation to that effect. Although the legislature does not always do this
(because it values judicial precedent), the important thing to note is that it is capable of doing so. Of course,
if the legislature were to override precedent and substitute for it a legislative enactment, the enactment
would have to be in conformity with the Constitution. This stands to reason if one has regard to our
discussion of the supremacy of the Constitution.
Unlike in the past, when courts were generally governed by judges’ personal sense of equity and
justice, today courts are governed by the Constitution. Section 39(2) of the Constitution provides:

12
At 956B.
13
Delictual actions are discussed in chapter 3.
14
At 255B.
15
At 256G and 259A.

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‘When interpreting any legislation, and when developing the common law or customary law, every court, tribunal or
forum must promote the spirit, purport and objects of the Bill of Rights.’

This provision has a radiating effect on the common law and has been interpreted to mean that courts cannot
make precedent and cannot simply follow precedents of yesteryear without checking to see if those
precedents are in conformity with the Bill of Rights. Here the decision in Ryland v Edros 1997 (2) SA 690
(C) is instructive. In this case, the question came before the court whether an Islamic marriage
contract was enforceable. In Ismail v Ismail 1983 (1) SA 1006 (A), a 1982 decision of the Case
16 illustration
Appellate Division (then the highest court in the land ), the court held that an Islamic
marriage contract was offensive to public policy because Islamic marriages were potentially
polygamous.17 In Ryland v Edros 1997 (2) SA 690 (C), a post constitutional decision, the Western Cape
High Court (then the Cape High Court) held that the decision in Ismail was irreconcilable with the Bill of
Rights and refused to follow the precedent set in Ismail.18 The Ryland court referred to the provisions in the
Bill of Rights dealing with equality, dignity, religious freedom and cultural diversity and held that an Islamic
marriage contract was in accordance with contemporary public policy and hence enforceable between the
parties.19
The lesson to be drawn from Ryland is that the precedents of the past are not necessarily applicable
today. We have to constantly test past precedents against the constitutional value system. Of course, this is
not ideal when one is trying to determine the law, because it means that our law is in a state of flux; it is
susceptible to change if an appropriate constitutional argument can be made. But at the same time, it must
be noted that as the law is a reflection of our society, we cannot transform our society if we do not transform
the law.
Judicial precedent is intimately linked to the hierarchy of our courts. At the apex of our court system
is the Constitutional Court, situated at Constitution Hill in Braamfontein in Johannesburg. After that,
follows the Supreme Court of Appeal, situated in Bloemfontein. Then come the various High Courts, each
having a specific territorial jurisdiction within the nine provinces of South Africa.20 The High Courts are
followed by the Magistrates’ Courts. At present there are more than 410 Magistrates’ Courts in South Africa,
each operating within their own magisterial districts. Magistrates’ Courts are divided into district divisions
and regional divisions. District divisions can hear claims from R1 to R200 000 and regional divisions can
hear claims from R201 000 to R400 000.21
At the end of the rung are the Small Claims Courts. They can hear claims to a maximum of R20
22
000.
The Magistrates’ Courts and the Small Claims Courts are either mentioned by name or by the
generic term ‘lower courts’ in Chapter 8 of the Constitution.
The Constitutional Court is the highest court in constitutional matters and matters of public
importance. Each one of its decisions is binding on every other court and all spheres of government. For a
case to be considered a constitutional matter, it must have a constitutional issue that turns on a provision of
the Constitution. However, for a matter to be considered to be of public importance, it does not have to be
grounded purely in the Constitution; the issue in question can turn on the common law, which the court

16
Currently, the Constitutional Court is the highest court in the land and the former Appellate Division is known as the
Supreme Court of Appeal. See further discussion below.
17
At 1024D-F and 1025A-B.
18
At 705C.
19
At 708J-709A.
20
With effect from March 2009 all the High Courts in South Africa have new names. This is set out in the Renaming of the
High Courts Act 30 of 2008.
21
The distinction between district and regional divisions of the magistrates was introduced by the Jurisdiction of Regional
Courts Amendment Act 31 of 2008 which came into operation on 9 August 2010.
22
For information on Small Claims Courts see [Link]

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deems necessary to hear because it is of significant importance and it might impact on constitutional values.
The Constitutional Court is presided over by the Chief Justice, and when a matter comes before it, at least
8 of the 11 justices must preside over the case. The view of the majority constitutes the court’s decision.
Everyone, including the state, is bound to follow its decisions.
Every time an Act of Parliament, provincial legislation, or conduct of the President of the Republic
of South Africa is declared unconstitutional by any other court in South Africa, that order of
unconstitutionality must be reviewed and confirmed or rejected by the Constitutional Court.
The Supreme Court of Appeal was formerly known as the Appellate Division. However, Chapter 8
of the Constitution changed the name of the court. The court is presided over by the President of the
Supreme Court of Appeal, and the usual quorum of the court is 5 judges. Like the Constitutional Court, the
view of the majority constitutes the court’s decision. This court can hear all types of matters, including
constitutional matters, and is the second highest appellate court in the country. Once it rules on an issue, its
decision is binding on all other courts and every person in the land. However, a litigant has a right of further
appeal to the Constitutional Court. But, if the litigant chooses not to take the matter to the Constitutional
Court, the decision of the Supreme Court of Appeal on that particular issue is binding over all other courts,
except the Constitutional Court, which is always at liberty to overturn the decision of the Supreme Court of
Appeal, if an appropriate case comes before it later on.
Unlike the Constitutional Court and the Supreme Court of Appeal, which are courts of appeal and
do not hear oral evidence, the High Courts are courts of first instance. They can hear all types of non-
constitutional and constitutional matters. At present there are also a number of specialist courts with the
same status as the High Court, such as the Labour Court, the Tax Court, the Competition Court etc. These
specialist High Courts only hear specific types of matters. However, should a matter arise in the law of delict,
contract, company law, etc. the matter will go to the non-subject-specific High Courts. Each province in
South Africa has at least one High Court. However, in the larger provinces there may be two High Courts
servicing a specific locality within that province. In Gauteng, for example, there are two: the South Gauteng
High Court and the North Gauteng High Court.
In contradistinction to the Supreme Court of Appeal and the Constitutional Court, whose decisions
are binding on each and every lower court in the land, the High Courts’ decisions are not necessarily so. A
decision of a High Court is binding on all Magistrates’ Courts falling within that province, but is not binding
on Magistrates’ Courts in other provinces or on other High Courts in other provinces. The decision of one
High Court is only of persuasive authority for a High Court of another province.
When two or more judges of a particular High Court preside over a matter, the decision that comes
out of that matter is binding on all single bench courts (i.e. courts where only one judge presides) of that
same High Court. In legal parlance we say that a decision of a full bench is binding on a single bench of the
same Court. But it is imperative to note that even a single judge of division X can refuse to follow a full bench
of division Y. However, the reality is that courts consider themselves ‘presumptively’ bound by decisions
emanating from other High Courts (even single bench ones) unless they find a good reason to deviate
therefrom.
Magistrates’ Courts are lower courts. None of their decisions constitute precedent. Their decisions
are not published in the law reports, whereas the decisions of the High Court, the Supreme Court of Appeal
and the Constitutional Court are reported.
Magistrates’ Courts are obliged to follow precedents coming from higher courts as outlined above.
To reiterate the position: A decision of a High Court is binding on all Magistrates’ Courts falling within the
territorial area of that High Court, but a decision of a High Court of one province is not binding on
Magistrates’ Courts in other provinces.
Magistrates’ Courts are creatures of statute. As such, their powers are limited to what is set out in
the Magistrates’ Courts Act 32 of 1944. In terms of the Act, they have jurisdiction to hear all contract and
delict matters. They also have jurisdiction to hear a wide spectrum of commercial matters. People prefer

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going to the Magistrates’ Courts because it is cheaper to do so. Litigation can be very expensive and to put
it in colloquial terms, the Magistrates’ Courts operate at ‘Toyota Corolla’ rates whereas the High Courts
operate at ‘Rolls Royce’ rates. Litigants thus only go to the High Courts if the value of their claim is
substantial – more than R400 000. They also only go to the High Courts if the matter is too complex and
falls outside of the jurisdiction of the Magistrates’ Courts, or they wish to take a matter on appeal from the
Magistrates’ Courts to the High Courts.
In the normal course of events, this is how a matter will progress through our courts: A matter will
originate in the Magistrates’ Court. Should any of the parties wish to appeal the matter, they will lodge an
appeal with the relevant division of the High Court that has jurisdiction over the particular Magistrates’
Court whose decision is being appealed. Should they be unsatisfied with a decision of the High Court, the
matter will go on further appeal to the Supreme Court of Appeal. If the matter involves a constitutional issue
or a legal issue of significant public importance, there will be a final right of appeal to the Constitutional
Court. It must be noted, however, that if a matter originates in the High Court (because the value of the
claim or the subject matters falls within the jurisdiction of the High Court), then before the matter can be
taken on appeal to the Supreme Court of Appeal or the Constitutional Court, the matter might first have to
be appealed to the same High Court that initially heard the matter. This will happen when a single judge
initially hears the matter, for in that case, the appeal will be taken to a full bench consisting of three judges.
But if more than one judge initially heard the matter, then appropriately, the case is taken on appeal to the
Supreme Court of Appeal.
The final thing to note about judicial precedent is that not every part of a judgment constitutes
precedent. Lawyers draw a distinction between what is termed ‘ratio decidendi’ and ‘obiter dictum’. Only the
ratio decidendi constitutes precedent. The ratio of a case is that part of the judgment containing the actual
legal principle having regard to the material facts of the case. This excludes the reasoning of the court in
arriving at the legal principle. The latter constitutes obiter dictum. Furthermore, the facts of a case and the
court’s conclusions on the facts also do not constitute precedent. In the Pinchin case (discussed above), for
example, the ratio would have been that a child may bring a delictual claim for prenatal injury. The court’s
references and discussion of foreign law constitute obiter dictum. Furthermore, the court’s finding on
whether the defendant driver of the car was actually negligent and whether, on the facts before the court, he
had caused the harm would also be irrelevant for the question of determining the precedential value of the
case. These are factual issues and hence are treated as obiter.
The decisions of our courts (but not the Magistrates’ Courts, whose decisions are not reported) are
found in the law reports. These are available in written and bound form or in electronic format. The major
written and bound law reports are: the South African Law Reports, the Butterworths Constitutional Law
Reports and the All South African Law Reports. There are also subject specific law reports such as the
Labour Law Reports, Tax Reports, South African Criminal Law Reports etc. The electronic version of the
law reports can be accessed via Juta’s Jutastat electronic database and LexisNexis Butterworths Legal Suite.
All law libraries in South Africa and many law firms have access to the written and bound versions of the law
reports, as well as the electronic versions. Today, the decisions of various courts can be found on the
Internet. For example, the Constitutional Court and the Supreme Court of Appeal publish their decisions
on their websites. However, one of the best ways to find cases is to go to the following website:
[Link] .

(d) Roman-Dutch law

Aside from judicial precedent, the common law of South Africa consists of the views of Dutch scholars of
the 16th century. This may come as a surprise to most people.
We inherited the laws of Holland when South Africa became a Dutch Colony in the 17th century.
Between the 15th and the 17th centuries, European scholars rediscovered the 6th century laws of the Roman

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Empire that were codified by the Emperor Justinian. These scholars (who for our purposes were all Dutch)
were so impressed by the systematic, structured and comprehensive manner of these laws that they
republished these texts and added their own commentaries on these ancient works. Hence, the term
‘Roman-Dutch law’ to signify that the laws are Roman in spirit as commented upon by the Dutch scholars.
Many European countries no longer regard the views of the Dutch scholars as authority as they have
adopted modern law codes. For example the Netherlands has adopted the Dutch Civil and Criminal Codes
to contain an exposition of its laws. But in South Africa we still treat the writings of the Dutch scholars as
authority. Were you to page through the law reports you would often come across references to the writings
of Johannes Voet, Hugo Grotius, Simon van Leeuwen, Simon van der Linden, Groenewegen, etc. All of
these are great Dutch masters who published major treatises commenting on and discussing various areas
of the law.
There are several difficulties with relying on Roman-Dutch law. Firstly, it is difficult to access, as
many of the treatises are written in classical Latin or Dutch and are very hard to understand. Secondly,
reliance on these sources can be problematic in terms of keeping our law modern. As regards the former
concern, fortunately many of the treatises have been translated and have been commented upon in every
modern textbook. It should be noted, however, that modern textbooks are not binding sources of law and
hence, modern lawyers still tend to study the writings of the old authorities either in their original form
(which they access at court libraries or university libraries) or by referring to authoritative translations.
Therefore, the first concern as it relates to access to information is not insurmountable. The second concern,
however, is more acute.
When one is constantly referring to the old authorities as sources of law, there is a real danger that
our law will be anachronistic. In Aronson v Estate Hart and Others 1950 (1) SA 539 (A) a testator
imposed a condition on his beneficiaries to the effect that if any of his beneficiaries ‘forsook Case
the Jewish faith or married outside of the Jewish faith’ they would forfeit the inheritance left illustration
to them. The Appellate Division (now the Supreme Court of Appeal) held that since such
clauses were acceptable in 16th century Roman-Dutch Law, they were acceptable in 1950 (when the case
was decided). This case was criticised by the academic writers who held that it was wrong for the court to
have applied the standards of the 16th century in the 20th century. It is submitted that this criticism is correct.
The court should have evaluated whether the clause was in conformity with societal values in the 20th
century.
To illustrate the point even further: In Bank of Lisbon of South Africa Ltd v De Ornelas
and Another 1988 (3) SA 580 (A), the respondent wanted the Appellate Division to set aside Case
a suretyship contract for containing clauses which had an unconscionable (harsh) effect. In illustration
terms of the suretyship contract, the debtor was bound to the terms of the contract, not only for
debt incurred in respect of which the contract was entered into, but also for any future debt incurred by the
debtor vis-à-vis the creditor Bank.23 In its attempt to persuade the court to set aside the contract, the
respondent relied on a legal defence which existed in Roman law called the exceptio doli generalis. However,
the court did not find favour with this defence.24 Although the court acknowledged that the debtor in this
case did not realise that the suretyship contract had such a far-reaching effect when it concluded the contract,
the court held that the principle of freedom of contract had to stand. Furthermore, a person who agrees to a
contract and signs that contract cannot later be heard to say that the contract must be set aside because that
contact is prejudicial. To allow people to set aside contracts on this basis would threaten the sanctity of
contracts. As regards the applicability of the exceptio doli generalis (a defence relied upon by contractants to

23
At 609E-F.
24
At 607B.

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ameliorate instances of contractual harshness), the court held that since the defence was not part of 16th
century Roman-Dutch law, it was not part of modern South African law.25
The Bank of Lisbon case was criticised for taking an overly formalistic and narrow approach to our
law. An insistence on tracing our law to the 16th century in order for it to be treated as legitimate can be a
negative pursuit for our law, which needs to keep up with challenges presented by modern times.
Fortunately the legislature is free to override Roman-Dutch law by means of legislation. Thus we
see, in many areas of the law, that the pristine principles of Roman-Dutch law have been overridden by more
modern enactments. However, having said this, it is also key to note that there are many areas of the law
where Roman-Dutch law remains the main source of the law and only time will tell how courts will apply
these principles in the future. Of course, with the advent of the Constitution, the courts are empowered and
obliged to develop the Roman-Dutch principles so that they are in conformity with ‘the spirit, purport and
objects of the Bills of Rights’26, and in fact, the courts have been consistently doing so, as you will see from
your reading in this set of notes.

(e) African customary law

One would be sorely mistaken if one thought that law arrived in South Africa when the Dutch landed here
in 1652. Long before the Dutch arrived in South Africa, the indigenous people of this land practised African
Customary Law.
Although African Customary Law (ACL) was recognised during colonial times, its status was inferior
to the institutional law of the land i.e. Roman-Dutch law. Between 1652 and 1988 ACL was not enforced in
the Supreme Courts (now High Courts) or in the Magistrates’ Courts. ACL was applied only in Chieftain
Courts and in matters concerning black people. Sometimes in the Chieftain Courts ACL could not be
practised at all. This was the case where legislation specifically provided that ACL did not apply to a
particular transaction. In 1988 Chieftain Courts were abolished and from then on ACL was applied in the
Supreme Courts (now High Courts) and in the Magistrates’ Courts. However, a judicial officer, depending
on the type of matter and the colour of the litigants’ skin, had discretion to apply either ACL or the
institutional law of the land.
The inferior status of ACL has been changed by the Constitution. In terms of section 211:
‘The courts must apply customary law when that law is applicable, subject to the Constitution and any legislation that
specifically deals with customary law.’

The aforementioned provision gives ACL equal status to what may be termed ‘mainstream law.’
Once the court determines that a legal issue before it is governed by ACL, it must apply Case
ACL. It no longer has discretion not to. The application of ACL is, of course, subject to the illustration
Constitution, which as the supreme law of the land remains trumps. For example, in Bhe v
Magistrate, Khayelitsha 2005 (1) SA 580 (CC), the Constitutional Court was asked to determine the
constitutionality of the primogeniture rule which existed in the customary law of succession. In terms of this
rule, if a deceased was survived by male descendants, male ascendants or male collaterals, such males
inherited from the deceased to the exclusion of the deceased’s wife, the deceased’s female descendants,
female ascendants or female collaterals. Evidently, the rule discriminated against females. Unsurprisingly,
therefore, the Constitutional Court held that this rule violated the equality clause of the Constitution and
struck down the rule which was entrenched in and recognised by section 23 of the Black Administration Act
38 of 1927.27

25
At 605H-I.
26
Section 39(2).
27
616 para [73].

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Since ACL is not of much relevance to you, no more will be said on this area of law. However, the
importance of this area of the law cannot be understated and explains why it is taught as a distinct subject in
most law schools.

(f) Custom

Customary law refers to those laws which have, overtime, come to be recognised as acceptable by a
community or by people in a particular fraternity. In a sense one may argue that African Customary Law
(ACL) is part of customary law, but in reality customary law has the potential of acquiring a much wider
application than ACL.
For a custom to attain the status of law it must be certain, reasonable and uniformly observed by a
cross-section of members of the community, and it must have existed for a long time. A party alleging the
existence of a custom has to satisfy the court that these requirements have been met.
The case of Van Breda v Jacobs 1921 AD 330 is illustrative. Van Breda and Jacobs were captains of
fishing boats operating out of Simonstown in the Western Cape. One day, they caught wind of
a shoal of fish travelling to Glencairn. They summoned their respective companies of Case
fishermen and pursued the shoal. Van Breda and company arrived at Glencairn beach first illustration
and sprawled out their fishing nets. Shortly thereafter, but before the fish arrived, along came
Jacobs and his fishermen. To trounce Van Breda’s attempts at netting the fish, Jacobs laid out his nets in
front of Van Breda’s. Unsurprisingly, Jacobs and his crew caught the shoal. Van Breda left the scene deeply
disappointed, but not defeated, for shortly thereafter Van Breda issued summons against Jacobs in which he
claimed £32, being the value of the catch for the day.
The question before the court was whether Jacobs committed a ‘wrongful act’ because if he had,
then the claim would succeed. There was no legislation governing this issue from which it could be inferred
that a wrong had been committed. Furthermore, Roman-Dutch law was silent and ACL did not apply on
the facts of the case. The only potential source of law was custom. In this case 11 witnesses testified in court
that for at least 25 years in Simonstown there was a general understanding in the fishing fraternity that once
‘fishermen have set their line for the purpose of catching a shoal of fish seen travelling along the coast, no
other fishermen [were] entitled to set a line in front of theirs within a reasonable distance therefrom’.28 Since
the custom was well known, was fair and just, had been consistently followed by all community members
and had been in existence for such a long time, the court concluded that Jacobs committed a wrongful act.29
Consequently, he was obliged to pay Van Breda for the value of the fish caught.

(g) Conclusion

Aside from the aforementioned sources of law, it should be noted that South African law is also influenced
by English law. This is on account of our colonial history during which both the Dutch and the English at
one time or another ruled this land. While Roman-Dutch law is regarded as a source of our law, it is
interesting to note that English law is not. However, this is not to suggest that English law has not influenced
South African law. In fact, many areas of our law bear unmistakable English influences. Our law relating to
companies for example is, by and large, based on English law. In the law of contract and delict there are also
vast English influences. So why is English law not regarded as a source of our law? Well, the answer to this
seems to be politically motivated. From the time the Union of South Africa was declared, our courts and
academics started showing distaste towards English law and, in many cases, tried to recast those areas of our
law which had been influenced by English law into a Roman-Dutch mould. This process of eschewing the
English influence over our law continued until the 1980s when the courts and a new generation of academics

28
at 333.
29
at 337.

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realised that the process of denying English influence was artificial and futile. With democratisation, there
has been a resurgence of reference to English law. Today, we are less intimidated to refer to, or to
acknowledge the influence of, English law, and indeed when discussing the law, courts refer to many other
legal systems, including African systems of law. We frequently refer to the decisions of English courts in
order to assist us to clarify the law or to help us develop our law, especially where we know that a particular
legal principle has been influenced by English law. However, having said this, it is still imperative to note
that unlike the Roman-Dutch law of the 16th century, English law is not regarded as a binding source of
South African law.

B. BRANCHES OF LAW

BRANCHES OF
THE LAW

PUBLIC LAW PRIVATE LAW PROCEDURAL

LAW
Administ Constitu Law of Law of Commercial
Criminal Interpretation of law of Property Law
rative tional Obligations Persons Law Civil Criminal
Law Statutes succession
Law Law Procedure Procedure
Law of Labour
Law of Law of Legal Law of
Contract Law
Delict Personality Marriage
Law of
Evidence
Law of Unjust
Enrichment Insolvency
Law Tax

Banking and Forms of

Negotiable Business
Instruments enterprises

Think of South African law as a giant tree with three trunks, many branches and a plethora of giant leaves.
The three trunks are: Public Law, Private Law and Procedural Law. Immediately one may ask: what
about Commercial Law? Well, although Commercial Law is often thought of a distinct area of specialisation,
it is actually a derivative of Private Law.
Public Law consists of four branches: Criminal Law, Administrative Law, Constitutional Law and
Interpretation of Statutes. In these notes these branches will be mentioned in passing, but there will be no
need to consider any of them in detail.
Procedural Law consists of the Law of Civil Procedure, Criminal Procedure and the Law of
Evidence. Again, these branches will be treated in passing.
The most important trunk for the purposes of your practice is Private Law. Private Law has many
branches: the Law of Obligations, the Law of Persons, the Law of Property and Commercial Law.
The Law of Obligations has three leaves: the Law of Delict, the Law of Contract and the Law of
Unjust Enrichment. Contract and Delict are relevant to you. Unjust Enrichment may be of some relevance
too, but to a lesser extent. Hence, this area of law will not be considered separately. Unjust Enrichment will
be mentioned in passing when Delict and Contract are discussed.
The Law of Persons has two leaves: the Law of Legal Personality and the Law of Marriage. The
general rule is that only ‘legal persons’ are entitled to rights and incur obligations. A study of the Law of
Persons is thus essential for anyone wanting to appreciate when legal personality starts, circumstances under
which it diminishes and when it ends. However, for your study there is no need to go into significant detail
about legal personality. It will always be assumed that the persons or entities that you are working with are
legal persons. If we do come across instances where legal personality may be an issue, this will be pointed
out to you. The Law of Marriage, as the title suggests, deals with the requirements for and the consequences

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of marriage. While marriage influences many transactions, again there is no need to treat this subject in much
detail. Where marriage is an issue affecting certain types of transactions, it will be pointed out to you.
The Law of Property is concerned with everything relating to movable, immovable, tangible and
intangible property. For your purposes this, too, will remain untreated.
Commercial Law has five leaves: Forms of Business Enterprises, Tax Law, Labour Law, Insolvency
Law, Banking and Negotiable Instruments Law. Of this gamut of subject areas only the Forms of Business
Enterprises will be treated.
So you see the law is vast. There are many subject areas and they all tend to blend together. Lawyers
are expected to have a working knowledge of each and every branch of law and they are also expected to
understand the interrelationship between all the subject areas. However, in your life as an actuary there is
no need for such a deep understanding. You need a working knowledge of those areas of law that affect your
industry. It is with this in mind that you will only be taught the Law of Contract, the Law of Delict, and
Forms of Business Enterprises. The purpose of this study is to enable you to analyse and anticipate the legal
consequences of those daily transactions that you are most frequently engaged in.

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CHAPTER TWO
THE LAW OF CONTRACT
A. DEFINITION

T here are many ways to define a contract. One way is to characterise a contract as a bilateral deliberate
act between two or more people possessing legal capacity in terms of which either or all of them
agree to do something or not to do something for themselves or for someone else giving rise to
immediate or future rights and obligations.
From this definition five propositions follow:
(a) A contract is dependent on the two or more parties forming an intention to enter into a contract
(‘bilateral deliberate act’).
(b) Only parties with legal capacity can be bound to a contract. People of unsound mind are incapable of
entering into contracts. Furthermore, people whom the law deems to have diminished legal capacity
(such as minors, insolvents and some married people) are also prevented from entering into contacts or
certain types of contracts (‘legal capacity’).
(c) It is not necessary for each party to a contract to derive a benefit therefrom. A contract can be completely
one-sided e.g. X enters into a contract with Y in terms of which X promises to give Y his house the next
time Halley’s Comet is seen in our skies. This is a valid contract, even though it seems that X derives no
benefit from the contract in terms of consideration – (‘either or all of them’).
(d) A contact may impose positive or negative duties on the parties. Thus, depending on the nature of the
contract, the performance owing may be a positive performance or a negative performance (‘to do
something or not to do something’).
(e) A person may derive a benefit from a contract even though he is not a party to the contract. A classic
example of this would be where an insured enters into an insurance contract with an insurance company
for the benefit of a named beneficiary, who may not even know that the contract exists. The fact that the
beneficiary is not a party to the contract does not limit the insurance company’s obligation to perform
towards the beneficiary when the insurable event occurs (‘for themselves or for someone else’).
(f) A contract may have immediate effect or its operation may be postponed to a future date. If we consider
the example of X and Y in (c), then it is quite apparent that the contract is only enforceable when
Halley’s Comet appears in our skies. To this extent, the contract is suspensive (‘immediate or future
rights and obligations’).

B. COMMON LAW VERSUS CONSUMER PROTECTION ACT 68 OF 2008 (CPA)

In terms of the preamble to the CPA, its purpose is to promote and advance the social and economic
welfare of consumers in South Africa by—
‘(a) establishing a legal framework for the achievement and maintenance of a consumer market that is fair,
accessible, efficient, sustainable and responsible for the benefit of consumers generally;
(b) reducing and ameliorating any disadvantages experienced in accessing any supply of goods or services by
consumers—
(i) who are low-income persons or persons comprising low-income communities;
(ii) who live in remote, isolated or low-density population areas or communities;
(iii) who are minors, seniors or other similarly vulnerable consumers; or
(iv) whose ability to read and comprehend any advertisement, agreement, mark, instruction, label,
warning, notice or other visual representation is limited by reason of low literacy, vision impairment or
limited fluency in the language in which the representation is produced, published or presented;
(c) promoting fair business practices;
(d) protecting consumers from—

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(i) unconscionable, unfair, unreasonable, unjust or otherwise improper trade practices; and
(ii) deceptive, misleading, unfair or fraudulent conduct;
(e) improving consumer awareness and information and encouraging responsible and informed consumer
choice and behaviour;
(f) promoting consumer confidence, empowerment, and the development of a culture of consumer
responsibility, through individual and group education, vigilance, advocacy and activism;
(g) providing for a consistent, accessible and efficient system of consensual resolution of disputes arising from
consumer transactions; and
(h) providing for an accessible, consistent, harmonised, effective and efficient system of redress for consumers.’

While the CPA is without doubt a very significant piece of legislation in terms of reducing power imbalances
between suppliers of goods and services and consumers, the Act does not replace basic principles of contract
law. In fact, in many respects, the Act confirms contract law principles and places a positive obligation on
service providers and goods suppliers to transact fairly by preventing them from using contract law in such
a way as to give themselves an unfair advantage. Unfortunately, in the past, many suppliers used the law of
contract to create contractual relationships that were weighted in their favour and which limited the rights
of the consumer. The CPA seeks to remedy that situation.
Consumer protection legislation exists all over the world. There is a need to regulate contract terms,
because experience has shown that on account of our fast moving world where people are often pressurised
to enter into contractual relationships quickly, consumers are not necessarily familiar with what they are
entering into. Contracts couched in standard terms, jargon and fine print are the norm. Furthermore,
systemic inequality in bargaining power often results in the corporation having more rights than the
individual. The South African CPA, like its foreign equivalents, seeks to address all of these issues.
The CPA only regulates consumer contracts, meaning contracts for the supply of goods and
services by suppliers to consumers in the ordinary course of business and in exchange for payment. The CPA
for example, does not apply to employment contracts or sale agreements between persons who are not
ordinarily engaged in the business of buying and selling goods. The terms ‘consumer’, ‘supplier’, ‘supply’,
‘goods’ and ‘services’ are thus key concepts to understand which transactions are covered by the CPA. A
‘consumer’ is defined as:
‘(a) a person to whom those particular goods or services are marketed in the ordinary course of
the supplier’s business
(b) a person who has entered into a transaction with a supplier in the ordinary course of the
supplier’s business, unless the transaction is exempt from the application of this Act by section
5(2) or in terms of s 5(3)
(c) if the context so requires or permits, a user of those particular goods or a recipient or beneficiary
of those particular services, irrespective of whether that user, recipient or beneficiary was a party to
a transaction concerning the supply of those particular goods or services; and
(d) a franchisee in terms of a franchise agreement, to the extent applicable in terms of s 6(5)(b) to
(e)’

A supplier is simply defined as ‘a person who markets any goods or services’. However, the word
‘supply’ has a more extensive definition and provides a better indicates when a person can be said to
‘supply’ something. The Act provides:
‘“supply”, when used as a verb—
(a) in relation to goods, includes sell, rent, exchange and hire in the ordinary course of business
for consideration; or
(b) in relation to services, means to sell the services, or to perform or cause them to be
performed or provided, or to grant access to any premises, event, activity or facility in the
ordinary course of business for consideration’ (Italics inserted for emphasis.’

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As regards the meaning of ‘goods’ and ‘services’, the Act respectively defines these as follows:
‘“goods” includes—
(a) anything marketed for human consumption
(b) any tangible object not otherwise contemplated in paragraph (a), including any medium
on which anything is or may be written or encoded
(c) any literature, music, photograph, motion picture, game, information, data, software,
code or other intangible product written or encoded on any medium, or a licence to use any
such intangible product
(d) a legal interest in land or any other immovable property, other than an interest that falls
within the definition of ‘service’ in this section; and
(e) gas, water and electricity’

‘“service” includes, but is not limited to—

(a) any work or undertaking performed by one person for the direct or indirect benefit of
another
(b) the provision of any education, information, advice or consultation, except advice that is
subject to regulation in terms of the Financial Advisory and Intermediary Services Act 37 of
2002
(c) any banking services, or related or similar financial services, or the undertaking,
underwriting or assumption of any risk by one person on behalf of another, except to the
extent that any such service—
(i) constitutes advice or intermediary services that is subject to regulation in terms of the
Financial Advisory and Intermediary Services Act 37 of 2002; or
(ii) is regulated in terms of the Long-term Insurance Act 52 of 1998, or the Short-term
Insurance Act 53 of 1998
(d) the transportation of an individual or any goods
(e) the provision of—
(i) any accommodation or sustenance
(ii) any entertainment or similar intangible product or access to any such entertainment or
intangible product
(iii) access to any electronic communication infrastructure
(iv) access, or of a right of access, to an event or to any premises, activity or facility; or
(v) access to or use of any premises or other property in terms of a rental;
(f) a right of occupancy of, or power or privilege over or in connection with, any land or
other immovable property, other than in terms of a rental; and
(g) rights of a franchisee in terms of a franchise agreement, to the extent applicable in terms
of s 5(6)(b) to (e), irrespective of whether the person promoting, offering or providing the
services participates in, supervises or engages directly or indirectly in the service.’

What is evident from these definitions is that there is a wide range of commercial activities which fall
within the Act. But, for a supplier to fall within the Act’s purview, the supplier must provide goods and
services within ‘the ordinary course’. Thus if X sells a painting on a socal media platform or her car in
a private sale, the provisions of the Act will not apply because these are once-off transactions, and it
cannot be said that X is engaging in an activity that constitutes her business in the ordinary course.
However, an art gallery or a car dealership would be in a different boat. Where the CPA does not apply,
the common law principles of contract law will apply, with sale being a specific form of contract.
Sometimes it can be difficult to determine whether a transaction falls under the Act; for example, an
actuary who owns a flat for investment purposes and rents it out would not be acting in their ordinary

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course of business, but once a leasing agency is involved, the situation would be different, and the Act
would apply.
It is conceivable that a juristic person30 who is a consumer of goods and services might also
want to rely on the provisions of the CPA. However, if it has an asset value or turnover that exceeds
R2 million, the CPA will not apply. It may, however, rely on the protections offered by the common
law of contract without the additional protection of the CPA. The State as a consumer of goods and
services. is also precluded from benefitting from the CPA.31
Already-regulated sectors or industries can apply for an exemption from the Act. Such exemption
will be granted only if there is already sufficient protection for consumers in that sector. For example, the
insurance industry is not supposed to be regulated by the CPA as it has its own legislative framework.32. In
terms of Item 10 of Schedule 2 of the CPA, the insurance industry had 18 months from the date of
commencement of the Act (1 April 2011) to align its practices with the CPA. The Long Term Insurance
Act and the Short Term Insurance Act and the Regulations in respect of these two Acts were supposed to
have been aligned to meet the customer centric norms and standards of the CPA. The cut-off date for the
alignment was 1 October 2012. Unfortunately, the alignment did not occur by the due date and hence from
1 October 2012 the CPA applied to all insurance contracts. The Financial Services Laws General
Amendment Act 45 of 2013 amended the Long Term and Short Term Insurance Acts and in many respects
provides more protection than the CPA. This Act came into effect in February 2014. However, we have a
rather bizarre situation at present that the CPA functions in conjunction with the amendments introduced
by the Financial Services Laws General Amendment Act simply because the legislature did not get all its
ducks in a row by ensuring that the Long Term and Short Term Insurance Acts were aligned by 1 October
2012. As regards consumer credit law, this is regulated by the National Credit Act 34 of 2005, and the CPA
will not apply to transactions that fall under that Act.
The CPA introduces a number of significant changes: Firstly, courts will be allowed to invalidate or
alter a contract term which is ‘unfair, unjust or unreasonable’. Courts already recognise that occasionally a
contract term which is grossly immoral should be struck out. The CPA, however, gives the courts much
more far-reaching powers. Courts, for example, can even change the sale price of an item if they consider it
to be ‘unfair’. Terms such as ‘unfair’, ‘unjust’ and ‘unreasonable’ are up in the air at the moment, as these
terms are not defined in the Act, and the courts have not had the opportunity to give us guidelines as to their
meanings. The Act tries to define these terms, but in confusing and sometimes circular ways, which are of
little help.
Secondly, certain categories of clauses (e.g. clauses limiting the liability of the supplier) must be
brought to the consumer’s attention before he concludes a contract. Some clauses, the so called ‘grey terms’
are presumed to be unfair until the contrary is proved. The Regulations that were passed in terms of the Act
contains a list of these ‘grey terms’.33 This marks a very important shift in thinking because the ‘grey terms’
essentially place the supplier on the back foot. Previously, a consumer would have had to take the supplier

30
See chapter 4.
31
See section 5 read with section 6 of the CPA.
32
Other legislation wholly or partly aimed at Consumer Protection includes the Foodstuffs, Cosmetics and
Disinfectants Act 54 of 1972, Estate Agency Affairs Act 112 of 1976, Competition Act 89 of 1998, Housing Consumers
Protection Measures Act 95 of 1998, Housing Development Schemes for Retired Persons Act 65 of 1998, Rental
Housing Act 50 of 1999, Long-Term Insurance Act 52 of 1998, Short-Term Insurance Act 53 of 1998 as well as the
Policyholder Protection Rules promulgated under these Acts, the Financial Services Board Act 97 of 1990, the Collective
Investment Schemes Control Act 45 of 2002, Financial Advisory and Intermediary Services Act 37 of 2002 and the
Financial Services Ombud Schemes Act 37 of 2004.
33
Clause 44 of the Regulations to the CPA contains the ‘grey terms’ and can be accessed at:
[Link] (last accessed 18 March
2022).

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to court and convince the judge that a term was unfair for being against public policy. Now the onus is on
the supplier to prove that a ‘grey term’ is fair.
Thirdly, the Act requires that any written agreement must be in ‘plain language’. Plain language is
defined as language which an ordinary consumer in the class to whom the contract is intended, with average
literacy skills and minimal experience in such contracts, would understand.34 Every consumer is also entitled
to a free copy of any written agreement.35
Fourthly, the Act gives a list of prohibited terms that are void. These can never be validly included
in a consumer contract. These include clauses excluding liability for gross negligence and provisions falsely
acknowledging that no representations or warranties were made by the supplier.36
Fifthly, the Act provides that every entity in the supply chain is presumptively liable for defective,
hazardous or unsafe goods which cause harm to the consumer.37
Finally, the Act creates various bodies and tribunals, such the National Consumer Commission and
National Consumer Tribunal, to which consumers can more easily take their complaints. Access to justice
is a major problem in South Africa and consumers need to be able to bring complaints and resolve their
disputes without having to bear the immense costs of going to court.
In the notes below, reference will be made to the CPA and its Regulations when it is necessary to do so.
One will note that in many cases the legislation simply confirms the common-law position.

C. CONTRACTUAL CAPACITY

In light of the fact that the age of majority is 18 years,38 the general rule is that every person of age 18 and
above and who is of sound mind may enter into a contract.

(a) Minors

When a minor (i.e. a person below the age of 18) enters into a contract, for the contract to be valid the minor
must be ‘assisted’ by either of his parents or a legal guardian. If assistance (in the form of actual assistance or
permission) is not obtained, the contract can be set aside, and any payments made in terms of the contract
must be returned to the minor and performance due and owing by the minor will be extinguished.

(b) Mentally challenged and intoxicated individuals

People cannot be held accountable for their actions if they are unable to appreciate the nature and
consequences of their conduct at the time when the legal transaction is entered into. Therefore, a contract
entered into with a mentally challenged person (whether declared to have a mental health problem, or not)
is void.39 The contract may be set aside by any person acting on behalf of the mentally challenged person or
by the mentally challenged person himself when he recovers his senses and realises that he has entered into
a contract. People with subnormal intelligence, or who have ‘feeble minds’, or who suffer from ‘insane
delusions’ may also set aside a contract if it can be shown that at the time when they entered into the contract
they were unable to appreciate the nature and consequences of their actions.

34
Section 22(2).
35
Section 50(2).
36
Section 51.
37
Suppliers have certain defences (e.g. if retailers can show that they could not reasonably have monitored the quality of all the
goods they sell; distributors can show that they complied with the manufacturer’s instructions). This is a big improvement on the
common law because it shifts the burden of proof onto the supplier.
38
Children’s Act 38 of 2005, section 18. This section came into operation on 1 July 2007.
39
See also section 39 of the CPA.

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If a person is so intoxicated that she cannot understand the nature and consequence of her actions,
then a contract concluded under these circumstances is also void.

(c) Prodigals and insolvents

In contrast to mentally challenged persons or those suffering from a physiological mental defect, insolvents
and prodigals are different for they have capacity to enter into contracts, albeit a diminished capacity. A
prodigal is a person who by order of court is declared a spendthrift, incapable of managing his financial
affairs. When such a person wants to enter into a contract which affects his estate, he needs the consent of
his court-appointed curator. However, such a person is not precluded from entering into contracts which
do not affect his estate adversely. Therefore, a prodigal who wishes to donate anything would have to obtain
the consent of his curator, but a prodigal who desires to take out life or disability insurance or who wants to
conclude a contract of employment would not be required to do so. It is for this reason that one does not
think of the prodigal as lacking capacity entirely, but rather as having diminished capacity.
When a prodigal enters into an unauthorised transaction, the transaction is not void but voidable at
the instance of his curator. This means that his curator can either uphold the contract or rescind the contract.
The distinction between void and voidable contracts is discussed later in this chapter.
Like the prodigal, the insolvent, too, labours under diminished capacity. When someone is declared
insolvent, the court appoints a trustee to administer her estate. When an insolvent enters into a contract
which affects her insolvent estate, she must obtain the permission of her trustee. In the absence of such
permission, the contract is voidable at the instance of the trustee. An employment contract is an excellent
example of a contract which an insolvent can enter into freely without having to obtain the permission of
her trustee; whereas a sale alienating either movable or immovable property would be voidable if the trustee
did not consent thereto.

(d) Married people

Marriage and the incidents of marriage are governed by a number of statutes, the most important of which
are the Marriage Act 25 of 1961, the Matrimonial Property Act 88 of 1984, the Recognition of Customary
Marriages Act 120 of 1998, and the Civil Union Act 17 of 2006.
In the past, marriage was defined as a union between ‘one man and one woman to the exclusion of
all others.’ This definition has been subjected to constitutional scrutiny for discriminating against couples
in polygamous unions and also for not recognising same sex relationships. As regards the former, the
Recognition of Customary Marriages Act (see above) now recognises polygamous African customary
marriages if the parties have complied with certain formalities mentioned in the Act.40 It is, therefore, not
uncommon these days to come across marriage certificates issued in terms of the Recognition of Customary
Marriages Act. With regard to people in same sex relationships, the Constitutional Court Case
in the case of Minister of Home Affairs v Fourie 2006 (1) SA 524 (CC) ordered illustration
Parliament to pass legislation permitting gay and lesbian marriages. Parliament responded
by passing the Civil Union Act which came into operation on 1 December 2006. In terms of this Act people
in same or other sex relationships may now enter into a ‘marriage’ or a ‘civil union’.41 The decision of parties
to enter either into a ‘marriage’ or a ‘civil union’ is simply a question of personal preference, but as far as the
law is concerned, the legal consequences are exactly the same whether the parties choose to call their union
a ‘marriage’ or a ‘civil union.’42 Heterosexual, non-customary marriages are regulated by the Marriage Act of
1961.

40
See sections 2 and 3.
41
Section 2.
42
Section 13.

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It must be noted that marriages concluded in terms of Islamic law are still not recognised. The
decision in Ryland v Edros (this case was discussed in chapter one) did not recognise the Islamic marriage
per se; it only recognised the proprietary consequences flowing from an Islamic marriage contract. No one
knows for sure when law will be passed to give effect to such marriages, even though the courts have
chastised Parliament for failing to pass legislation to give effect to Muslim marriages.43 However, people
married by Islamic law can convert their marriage to a ‘normal’ marriage and thereby acquire full recognition
by complying with the formalities of the Marriage Act.
All marriages in South Africa (whether in terms of the Marriage Act, the Recognition of Customary
Marriages Act or the Civil Union Act) are either in community of property or out of community of property.
Where parties are married out of community of property, they may elect to marry with or without the accrual
system.
When a marriage is in community of property, all the assets of the parties are pooled and, on
dissolution of the marriage (whether by death or divorce), division of the joint estate takes place so that each
partner retains their half share of the joint estate. Simply stated, it is a 50/50 split. One of the consequences
of a marriage in community of property is that, by and large, the parties are jointly and severally liable for
each other’s debts. This means that they are individually and collectively liable for each other’s debts. If one
of the spouses goes insolvent, the entire joint estate has to be liquidated.
With marriages out of community of property, each party retains their own property; they are not
liable for each other’s debts; and when one of them goes insolvent, the property of the other partner remains
unaffected. For a marriage out of community of property the parties must enter into an antenuptial contract.
On dissolution of the marriage (whether by death or divorce), each spouse retains their separate estate;
however, if the spouses elect to marry out of community of property with the accrual system, the spouse
whose estate shows the greater growth since the commencement of the marriage would, on dissolution of
the marriage, be required to pay the other spouse, whose estate shows the lesser growth, an accrual amount
(equitable share). The Matrimonial Property Act contains the formula for calculating the accrual amount.44
Most people in South Africa who marry out of community of property incorporate the accrual system.
When one compares marriage in community of property to marriage out of community of property,
it seems like the logical approach would be to enter into a marriage out of community of property as this
provides the safer option in terms of preserving and protecting the spouses’ respective assets against claims
from creditors. However, there is still a significant segment of the population who choose to marry in
community of property. In other instances, people are simply unaware of the legal consequences of
marriage. Because marriage in community of property is the default position, people are often inadvertently
trapped into marrying in community of property.
In terms of the Matrimonial Property Act, which governs the proprietary consequences of all
recognised marriages, when parties are married out of community of property they are free to enter into all
types of contracts by themselves, without the assistance or consent of their partner. However, when parties
are married in community of property their ability to enter into contracts is fettered. The Matrimonial
Property Act is very specific in this regard and mentions those instances when either written or oral spousal
consent is required before a contract will be valid.45
Contracts involving the sale or mortgage of immovable property and suretyship agreements, for
example, require written consent from both spouses.46 Such consent must be given in the presence of two
witnesses.47 Contracts for the sale of shares or stocks or bonds in a financial institution forming part of the
joint estate also require the consent of both spouses, but such consent does not have to be given in the

43
Women’s Legal Centre Trust v President of the Republic of South Africa and Others 2018 (6) SA 598 (WCC).
44
See Chapter I of the Matrimonial Property Act 88 of 1984.
45
Section 15.
46
Section 15(2).
47
Section 15(5).

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presence of two witnesses.48 On the other hand, it should be noted that a spouse may, without the consent
of the other spouse, sell listed securities on the stock exchange and cede or pledge listed securities in order
to buy other listed securities.49 Contracts involving the sale of household furniture simply require oral
consent.50
In instances where spousal consent is required before a transaction can be entered into, lack of
consent will render the contract either void or voidable. Contracts of suretyship or contracts involving the
alienation or mortgaging of immovable property will be void.51 However, contracts for the sale of shares,
household furniture, jewellery, coins, stamps, paintings or any other assets forming part of the joint estate
will be voidable at the instance of the spouse whose consent has not been obtained.52
Apart from the contracts specifically mentioned as requiring consent in the Matrimonial Property
Act, spouses are free to enter into all other types of contracts without obtaining the consent of the non-
contracting spouse, even if the contract in question has financial implications for the joint estate.53 Thus
contracts for medical treatment, holiday packages, subscriptions to magazines and newspapers and clothing
account contracts – which are not specifically mentioned in the Act – do not require consent, and thus the
failure to obtain consent does not affect the validity of such types of contracts. It must be noted, however,
that even in these unspecified contracts, both parties continue to be jointly and severally liable for each
other’s debts.

Summary Diagram

Contractual
capacity is
affected by:

Insanity and Insolvency and

Minority Marital Regime
Intoxication Prodigality

D. WHEN DOES A CONTRACT COME INTO BEING?

In theory, a contract comes into being when the parties reach agreement on its terms. This is referred
to as a ‘meeting of the minds’ or consensus ad idem. As such, the parties must notionally be in agreement
as regards the fact that they are contracting, and also the contents of the contract. But, because it is
hard to prove that contractants were, at all times during the process of contract formation, on equal
wavelengths as regards the terms of a contract, and also on account of the fact that people sometimes
do not take the time and trouble to read contracts they are entering into, our law, as a matter of
practicality, will hold people bound to a contract even where there is no actual/genuine meeting of

48
Section 15(2)(c) read with section15(5).
49
Section 15(7)(a).
50
Section 15(3)(a).
51
Section 15(4).
52
Section 15(4).
53
Section 15(1).

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minds. This is so where one party leads the other party to reasonably believe that there is a meeting of
minds.
Since an actual meeting of minds is not necessary (and often, difficult to prove), the courts
look at other constitutive elements of contract formation to see whether or not the parties have
manifested a desire to enter into a contract. To this extent, the courts look to see whether the one party
has addressed a valid offer to contract and whether the other party has accepted that offer. By
determining whether a valid offer and acceptance took place, the courts are able to discern whether,
objectively speaking, a contract has come into existence.

(a) Offer

Simply put, an offer is a proposal by a contractant (the offeror) setting out the terms on which he or
she wishes to conclude a contract with the other party (the offeree). An acceptance, in turn, is an assent
on the part of the offeree to the terms contained in the offer.
For an offer to be considered valid, such that the mere acceptance of it will bring a contract
into existence, the following criteria must be satisfied:
(i) the offer must be clear, complete and unambiguous;
(ii) the offer must be made with an intention of creating a legally enforceable obligation;
(iii) the offer must be in existence at the time when the offeree accepts the offer.
Let us consider each of these criteria in turn.

(i) The offer must be clear, complete and unambiguous

This requirement is easy to understand. Essentially, the offer must encapsulate the essence of the
contract. If either of the parties has to supplement the terms upon which the offer is made in order to
make the contract viable, then a valid offer has not been made. Were a party to accept such an offer,
the ‘contract’ can later be set aside because the offer was vague.
Whether an offer contains all the necessary terms for it to constitute ‘a clear, complete and
unambiguous’ offer is determined by substantive law. Thus in a contract of sale if X said to Y: Would
you like to purchase my car? and Y answered yes that would not constitute a valid offer because no
mention is made of the price of the car. According to substantive law, price is an essential term of a sale
transaction and since this is not mentioned, the offer is not complete. But if X said to Y: Would you like
to purchase my car for R25 000? this would be a valid offer and upon Y simply answering yes a valid
contract would come into being.

(ii) The offer must be made with an intention of creating a legally enforceable obligation

An offer made in jest would not constitute a valid offer. Thus if someone said to you: I will shave my
head if South Africa wins the next Rugby World Cup, that would not constitute a valid offer.
Social agreements, too, are unenforceable. Thus if someone said to you: Let’s sail around the
world, and you answered yes, this would not give rise to a contract, because the ‘offer’ is nothing more
than a social agreement.
A ‘gentleman’s agreement’ is also unenforceable. In such an agreement the parties usually
agree between themselves to enter into a non-binding, but morally enforceable (as between
themselves) agreement. For example, two parties agree to fight a duel in order to settle a dispute. This
agreement is unenforceable because the offeror lacks the intention to create a legally binding offer –
the parties subjectively know that no court will enforce such an agreement because the agreement is
in violation of the law.
Interestingly, advertisements are also not offers. In a long line of cases, courts have held that
generally advertisements are invitations to treat/invitations to do business and do not constitute offers.

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When an advertiser places an advertisement in a newspaper, the advertisement is no more than a call
on members of the public to present the advertiser with an offer. However, in exceptional cases an
advertisement can constitute an offer. This all depends on the wording of the advertisement and the
purpose for which it was placed. In this regard, the courts have held that if someone places an
advertisement in a newspaper offering a reward for the performance of some action, this is an offer
rather than an invitation to do business. Therefore, if the South African Police Services places an
advertisement in the newspaper offering a reward for information leading to the capture of a thief, the
Minister of Safety and Security will be obliged to make good on the reward when the thief is captured
on account of information supplied by a person acting on the promise of the reward.
The general proposition that a commercial advertisement is nothing more than an invitation
to do business is best illustrated by the following English case. In Pharmaceutical Society of Great Britain
(Southern) Ltd v Boots Cash Chemists [1952] 2 All ER 456, Boots was taken to court by the
Case
Pharmaceutical Society of Britain for contravening the Pharmacy and Poisons Act of 1933.
illustration
In terms of that Act, it was unlawful for a person to purchase certain substances ‘unless the
sale [was] effected by, or [completed] under the supervision of, a registered pharmacist.’ Boots
had introduced self-service pharmacies where people could pick products off the shelf and pay for the
items at a cashier’s desk. According to Boots policy, a registered pharmacist was stationed at each
cashier’s desk to scrutinise each transaction.
The Pharmaceutical Society complained that Boots’ self-service method contravened the
provisions of the Pharmacy and Poisons Act. They argued that a sale occurred the moment a customer
took a product off the shelf and put in into a shopping basket. Because all the items were priced, it was
argued, a valid offer was made when the goods were set on the shelf and that the offer was accepted
the moment the items were placed in a shopping basket.
The court rejected the argument. The court held that by putting the items on display Boots
was doing nothing more than inviting customers to do business. The offer was only made when the
customers took the items to the cashier. Acceptance occurred, held the court, when the cashier rang
up the items. It was common cause that registered pharmacists were stationed at each till point. Thus,
held the court, Boots was not in contravention of the Act as acceptance by the cashier was supervised
by a registered pharmacist. To hold that a sale came into existence every time a customer picked an
item off the shelf and placed it in their basket, would have meant that a customer would never be able
change his or her mind about the item being purchased. Such a proposition, held the court, was
untenable. The legal rule emanating from the Boots case is part of South African law.

(iii) The offer must be in existence at the time when the offeree accepts the offer

An offer ceases to exist when it is rejected, revoked (withdrawn) or has lapsed. An offer can be rejected
outright, or it can be rejected subject to a counter-offer.
A counter-offer suggests that the offeree is interested in contracting, but on terms different to
that stated in the original offer. When a counter-offer is made, the original offeree becomes the offeror,
and the original offeror becomes the offeree. The original offeror (now offeree) is presented with a
choice to either accept the new offer or to reject it or to make a further counter-offer.
An offeror is free at any time before an offer is accepted to revoke (withdraw) the offer.
However, it is imperative to note that withdrawal of an offer must be communicated to the offeree. If
it is not, and the offeree accepts the offer, a contract is born.
An offer lapses if it is open for acceptance during a stipulated time period and that time comes
and goes. If an offer is not subject to a stipulated time period, it will lapse when a reasonable time has
passed. What is considered to be a reasonable time depends on the nature of the contract and the
surrounding circumstances. In the context of a sale agreement, a reasonable time period could range

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from a few hours or days if the thing sold has a volatile price, such as shares or perishable goods, to
weeks and even months if the thing sold has a stable price, such as cars and immovable property.
When an offer lapses, it can only be reinstated if a fresh offer is made.

(b) Acceptance

For an acceptance to be valid, the following requirements must be met:

(i) The acceptance must be made by the person to whom the offer was addressed;
(ii) The acceptance must be deliberate;
(iii) The acceptance must be clear, unambiguous and unconditional;
(iv) The terms of the acceptance must correspond to the terms of the offer; and
(v) The acceptance must have been communicated to the offeror.

Let us look at each of these requirements in detail.

(i) The acceptance must be made by the person to whom the offer was addressed

The importance of this requirement is best illustrated in the case of Bird v Sumerville 1961 (3) SA 194
(A). In this case, Bird wanted to sell a block of flats he owned. He appointed an estate agent Case
to find a suitable buyer. The property was advertised, and a certain Mr Sumerville illustration
approached the estate agent and said that he was interested in purchasing the property
together with a friend, one Mr Perkins. The estate agent erroneously drew up a deed of sale in which
he cited Bird as the seller and Sumerville, alone, as the buyer. The estate agent presented the deed of
sale to Bird, as offeror of the property, to complete certain sections thereof, which he duly did.
When the deed of sale was sent to Sumerville for acceptance and signature, the latter noted
the error and amended the deed of sale to reflect Perkins as the co-buyer. The deed of sale was signed
by Sumerville and Sumerville’s wife who had been given a power of attorney by Perkins to sign the
agreement on his behalf.
After Sumerville and Perkins (represented by Sumerville’s wife) had signed the deed of sale,
thereby accepting the terms of the agreement, but before the agreement was sent to Bird by the estate
agent, Bird contacted the estate agent and advised him that he no longer wished to proceed with the
sale. The estate agent insisted that there was a valid contract and that Bird was obliged to transfer the
property and to pay the estate agent’s commission.
Many months later Bird caught sight of the deed of sale as amended by Sumerville. It appeared
that the estate agent had deliberately prevented Bird from having sight of the agreement. After seeing
the amended deed of sale, Bird instituted action to set aside the sale. He argued that the sale was invalid
as it was not accepted by the person to whom he (Bird) had initially addressed the offer. The Appellate
Division agreed with Bird.54
The lesson at the end of the day is that an offer can only be accepted by the person or persons
to whom it is addressed. Should anyone else accept the offer, the ensuing agreement will be invalid.
Of course, sometimes parties stipulate in a contract that a contract may be accepted by an
executor, trustee or curator should the person to whom the offer is addressed die, be declared
insolvent, or be placed under curatorship. In the presence of such a stipulation, an executor, trustee or
curator can accept the offer on behalf of the original offeree and the contract will be perfectly valid.
However, if the contract does not make provision for this, acceptance by any other person, even acting
in a representative capacity, such as executor, trustee or curator, will render the contract invalid.

54
At 203E.

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(ii) The acceptance must be deliberate

An acceptance can only be made if the offeree knows of the existence of an offer. One cannot
accidentally accept an offer. This may sound rather ridiculous but consider the case of Bloom v
The American Swiss Watch Company 1915 AD 100. In this case, The American Swiss Watch Case
Company suffered a jewellery robbery. They placed an advertisement in a newspaper illustration
offering a £500 reward to any person who could give the police information that would lead to
the arrest of the robbers and the recovery of the stolen jewellery.
Several people gave information to the police which ultimately led to the arrest of the robbers
and the recovery of the jewellery. When all of these people claimed the reward, American Swiss did
not know who to pay and thus repudiated all of the claims. The informants eventually instituted action
against American Swiss. The latter paid the reward into court indicating that it was pleased for the
court to resolve the dispute. After a probing investigation the court concluded that the effective cause
for the arrest of the robbers was a certain Mr Bloom. However, there was just one little problem. At
the time when Mr Bloom delivered the information to the police, he did not know of the existence of
the offer of reward. Thus the court concluded that he could not have accepted this offer. The moment
he furnished the police with information, the offer of reward lapsed and hence, he could not on that
date or on any date after that accept the offer.55 Poor Mr Bloom! The consequence was that neither
Mr Bloom nor anyone else was entitled to claim the reward. Evidently, American Swiss scored. The
lesson: an unwitting acceptance of an offer is meaningless.

(iii) The acceptance must be clear, unambiguous and unconditional

This is to ensure that there is no uncertainty as regards the terms of the agreement. In Van
Jaarsveld v Ackermann 1975 (2) SA 753 (A) the court held a purported contract had not Case
come into existence because the acceptance was unclear and ambiguous. The facts which illustration
gave rise to this conclusion were as follows. A gave PH Van Jaarsveld ‘an option to buy or sell’
various properties for a price of R155 000. PH then ceded his rights under the option agreement to
one CP van Jaarsveld. CP van Jaarsveld then sent A a letter stating that he was accepting the option to
‘buy or sell’ the properties at R155 000. The Appellate Division held that the acceptance of the offer
was ambiguous because one cannot simultaneously buy property from its owner and at the same time
sell the property on behalf of the owner. These are mutually exclusive acts and hence, held the court,
the acceptance had to clearly accept one but not both.
Can one silently accept an offer? The answer to this is yes and no. Mere silence is not indicative
of acceptance, but silence accompanied by conduct which leads the offeror to reasonably believe that
the offeree has accepted the offer creates a strong inference that the offer was accepted. Take the
following example: You receive a sports magazine in the post. Attached to it is a form with an offer to
provide you with a magazine each month. The form also indicates that if you do not wish to accept the
offer you must complete and post the attached form within 10 days indicating that you do not wish to
subscribe to the magazine. Since this is an unsolicited subscription, there would be no obligation on
you to fill in the form. If you ignored the form, your silence will not give rise to an inference that you
have accepted the offer.56 However, if at the end of the following month, you paid the account after
receiving a further magazine, this will give rise to an inference that you have indeed accepted the offer.
Although you did not formally accept the offer by filling in the form sent to you, the act of paying the
account gives rise to an inference that you accepted the offer and that you acquiesced to the

55
At 104; 107.
56
Section 21 of the Consumer Protection Act confirms that when people receive products in the post which they have not
requested this constitutes ‘unsolicited goods.’ The consumer attracts no obligations vis-à-vis the supplier.

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subscription. Therefore, if the magazine company sends you a magazine after the third month you will
be obliged to pay for it. Your obligation will continue until you take formal steps to unsubscribe.
Unsolicited contracts are governed by section 31 of the CPA57, which prohibits ‘negative option
marketing’. However, it is unclear whether the initially invalid contract can acquire validity if the
consumer acquiesced to the unsolicited contract by, for example, paying the magazine subscription.
Contacting someone by mail or other electronic means would also constitute ‘direct marketing.
Section 1 of the CPA defines direct marketing as ‘to approach a person, either in person, or by mail or
electronic communication, for the direct and indirect purpose of promoting or offering to supply, in
the ordinary course of business, any goods or services to the person; or requesting the person to make
a donation of any kind for any reason.’ Where a person accepts an offer after direct marketing, they
have five days, in terms of section 16 of the CPA, to rescind the transaction. No reason is required for
the rescission, and the consumer cannot be penalised for his or her decision. Any money paid in lieu
of the transaction must be returned to the consumer within 15 business days.

(iv) The terms of the acceptance must correspond with the terms of the offer

If someone offered you bananas and you accepted apples, there would be no acceptance in this
instance. However, if someone offered you bananas and you accepted bananas and apples, there may
possibly be an acceptance, but only for bananas. The word ‘possibly’ is used because sometimes a
partial acceptance is acceptable and on other occasions a partial acceptance results in the rejection of
the offer in its entirety. This all depends on the nature of the contract and the surrounding
circumstances. Let’s say that you own a juice factory. X is a purveyor of fresh produce. You inform X
that you need a consignment of bananas and apples to make juice. X addresses an offer to you offering
apples at R10 a box. You accept the offer saying that you ‘accept apples and bananas at R10 a box.’ The
question arises whether there has been a valid acceptance. The answer to this is no! The possibility of
a partial acceptance can only arise if it can be shown that your request for bananas and apples was
divisible and that you would have been satisfied to receive either from X.

(v) The acceptance must be communicated to the offeror

As a general rule, an acceptance is valid only once the offeror acquires knowledge of the acceptance.
This makes sense. If the offeror does not know that his or her offer has been accepted, how will he or
she know whether a contract has come into existence? However, having said this, there are exceptional
instances when an acceptance itself will give rise to a contract even though the acceptance has not
reached the mind of the offeror. These exceptions are:

57
Section 31 provides:
‘(1) A supplier must not—
(a) promote any goods or services;
(b) offer to enter into or modify an agreement for the supply of any goods or services; or
(c) induce a person to accept any goods or services or to enter into or modify such an agreement,
on the basis that the goods or services are to be supplied, or the agreement or modification will automatically come into
existence, unless the consumer declines such offer or inducement.
(2) An agreement purportedly entered into as a result of an offer or inducement contemplated in subsection (1) is void.
(3) A modification of an agreement purportedly agreed to as a result of an offer or inducement contemplated in subsection
(1) is void.
This provision should be considered in conjunction with section 21, which confirms that when people receive products in
the post they have not requested, this constitutes ‘unsolicited goods.’ The consumer attracts no obligations vis-à-vis the
supplier.’

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a. If the offeror has expressly or impliedly dispensed with the requirement of being aware of the
acceptance: Express dispensing with the requirement of awareness of the acceptance is easy to
understand - the parties expressly (either orally or in writing ) agree that the moment the offeree
accepts the offer, a valid contract will come into being. However, an implied dispensing of the
awareness requirement is more complicated. Sometimes custom and trade usage determine
whether there is an implied awareness of acceptance. On other occasions, the parties’ prior dealings
may indicate that awareness of acceptance is not required.
As regards custom and trade usage, in the law of sale, it is a generally held custom that when
someone places an order for goods, the person receiving the order (the offeree) can dispatch the
goods immediately without communicating an acceptance to the offeror. A contract comes into
existence the moment the dispatch officer dispatches the goods. Furthermore, in postal contracts,
a contract comes into existence the moment the offeree posts his or her acceptance and not when
the acceptance comes to the attention of the offeror. However, in the case of fax or telephone
transactions, acceptance only occurs when the acceptance is successfully transmitted to and
printed by the offeror’s fax machine or when the offeror hears the acceptance through the
telephone earpiece, as the case may be. Emails are governed by the Electronic Communications
and Transactions Act 25 of 2002, which states than an email acceptance occurs when an email
arrives in the offeror’s information system and is capable of being retrieved.58
As regards parties’ prior dealings, where the parties have over a period of time operated on
the basis that awareness of acceptance is not necessary for the existence of a contract, a contract
will come into existence when the offeree is thought to have accepted the contract and takes steps
in terms of the parties’ working relationship towards performance of the contract.

b. If the offeror stipulated the means for communicating acceptance and the offeree took such steps,
but the acceptance never reached the offeror on account of no fault of the offeree: Thus where a
party instructs you to deliver your acceptance to a contract at a particular address by a stipulated
date and you do so, but the party was unavailable to receive the acceptance and only found out
about it after the period for acceptance expired, the acceptance will be valid and a contract will
come into existence.

c. If an offeror stipulates a date for performance, but gives no address at which the acceptance must
be communicated, and also frustrates the offeree’s attempts to bring the acceptance to the
attention of the offeror: In this situation a contract will come into being when the offeree delivers
the acceptance to the last known address of the offeror.

58
Section 22.

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Summary Diagram

express = either orally or in writing

the offeror has expressly or
impliedly dispensed with the
requirement of being aware of the
acceptance

impliedly = custom and trade usage

OR parties' prior dealings

offeror stipulated the means for

communicating acceptance and
acceptance must be
the offeree took such steps, but
communicated to the offeror
the acceptance never reached the
except when:
offeror on account of no fault of
the offeree

offeror stipulates a date for

performance, but gives no address
at which the acceptance must be
communicated, and also frustrates
the offeree's attempts to bring the
acceptance to the attention of the
offeror

E. FACTORS WHICH VITIATE CONSENSUS

In the previous section we discussed offer and acceptance as the prerequisites for consensus between
the parties. An invalid offer or an invalid acceptance vitiates consensus/genuine agreement between
the parties. However, there are a number of other factors which also cause consensus to be absent or
flawed. These are:
(a) Mistake;
(b) Misrepresentation; The
(c) Duress or undue influence.
difference
The aforementioned factors render a contract either void or voidable. If a contract is
void, it is deemed to have never come into existence. A void contract gives rise to no between a
contractual rights or obligations and consequently, gives rise to no claim for contractual void and
damages. If a party has performed in terms of a void contract, the party who performed voidable
would have to bring a claim under the law of unjust enrichment against the other party for
contract
recovery of performance. Unjust enrichment is an equitable remedy which exists in our law. It
permits a party to recover performance where he or she is unable to do so in other areas of the
law.
If a contract is voidable, it means that the innocent party has a choice to either repudiate the
contract or continue with it despite the existence of some factor which taints consensus. If the innocent
party elects to repudiate the contract, each party must be restored to the position that he or she
enjoyed before the contract came into existence. This means that any performance made by the parties
must be returned to the respective party. The idea of returning the parties to the position they
occupied before the contract came into existence is called restitutio in integrum (meaning: ‘return to
the beginning’). After restitution the innocent party is still at liberty to sue the guilty party for damages
flowing from the aborted contract. However, if the innocent party elects to uphold the contract, then

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each party must perform their side of the obligations in terms of the contract. Once an election is made
to uphold a contract, the innocent party cannot later change its mind and repudiate the contract.

(a) Mistake

Mistake renders a contract void. Parties labour under a mistake if they are mistaken as regards the
essentials on which the contract is based. There are three kinds of mistakes: (a) common mistake; (b)
unilateral mistake; and (c) mutual mistake.
• A common mistake is one which exists in the minds of both parties. They are both mistaken about
the exact same thing.
• A unilateral mistake is a mistake which exists in the mind of one party whilst the other party does
not suffer from any misapprehension.
• A mutual mistake refers to the situation where both parties are mistaken as to the essentials of the
contract, but they are each mistaken about different aspects.
Not all mistakes render a contract void. For a common mistake to render a contract void, the
mistake must be material. This is sometimes explained as a mistake ‘going to the root of a contract.’
For a unilateral or mutual mistake to render a contract void, one has to prove that the mistake is
material and that it is reasonable. If one cannot prove these requirements, the contract will stand even
though subjectively the parties did not have genuine agreement.
A mistake will be considered material if it can be proved that a party would not have entered
into a contract had she known the true facts giving rise to the contract. Our courts have held the
following kinds of mistakes to be material:
(a) A mistake as to the nature/type of the contract e.g. X thinks that she is entering into a sale
agreement when in fact she is entering into a donation agreement.
(b) A mistake as to the subject matter of the contract e.g. X thinks that she is purchasing a television,
but it turns out that what she is actually purchasing is a radio.
(c) A mistake as to the identity of the other party where identity is important e.g. X enters into an
antenuptial contract with Y when in fact she is marrying Z (Y’s identical twin).
The following types of mistakes have been declared non-material by our courts:
(a) A mistake as to the quality or characteristics of the subject matter of the contract e.g. X thinks she
is purchasing a car with 1200 horsepower. However, it turns out that the car only has 1000
horsepower.
(b) A mistake as to motive for entering into a contract e.g. X enters into a contract for the purchase of
a house because she believes that the current house she is residing in is haunted. She later learns
that her suspicions were completely unfounded.
(c) The identity of the other party where identity is not relevant for the other party’s ability to perform
in terms of the contract e.g. X thinks she is purchasing a Ferrari from Michael Schumacher when
in fact she is purchasing a Ferrari from Ralph Schumacher.
As mentioned earlier, for a unilateral or mutual mistake to render a contract void, the mistake
must be material and it must be reasonable. Since materiality has already been discussed, it is necessary
to consider the circumstances under which a mistake will be considered reasonable. For a mistake to
be reasonable our courts have said that the mistaken belief should either have been induced by the
other party (i.e. the non-mistaken party) by way of a misrepresentation (see discussion later), or the
non-mistaken party should have known that the mistaken party was acting on a mistaken belief. Under
these circumstances, the courts have held a mistake to be iustus i.e. reasonable.
Where a contract was reduced to writing and signed by both parties, it was difficult, in the past,
to persuade a court that a party was mistaken as to its terms. It was assumed that the parties took the
time to read the contract. There was an implicit assumption that the signatures were appended after

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the contract was carefully perused. When a contract was signed, it was difficult to prove that the non-
mistaken party should have known that the mistaken party was acting on a mistaken belief as to the
terms of the contract. To this extent, the principle caveat subscriptor applied – which literally means
‘let the signatory beware.’ When applying the caveat subscriptor principle our courts were generally
reluctant to set aside a signed contract on the basis of mistake. However, in exceptional cases, our Situations
courts relaxed the caveat subscriptor principle:
where the
(a) In situations where a party signed a document which did not have the character of a
contract, but which, nevertheless, contained contractual terms, the courts permitted a courts have
party to repudiate such a ‘contract’ on the basis of mistake. relaxed the
(b) In situations where a party signed a contract containing unexpected terms which a caveat
reasonable person would not have expected to find in that type of contract, the courts
subscriptor
relaxed the caveat subscriptor principle.
(c) The courts have also been lenient in cases where parties signed contracts but were able to show principle
that the terms of the contract did not mirror the pre-contractual negotiations between the
parties.
In all of these cases the courts held the ensuing mistake to be reasonable because the non-
mistaken party either knew or should reasonably have known that the mistaken party was unaware of
the terms of the written contract. In these instances, the courts said that the non-mistaken party was
duty-bound to point out the onerous terms of the contract, and by failing to do so the non-mistaken
party induced a reasonable mistake in the mind of the mistaken party. By way of illustration, consider
two actual cases which came before our courts.
In Dlovo v Brian Porter Motors t/a Port Motors Newlands 1994 (2) SA 518 (C), D took Case
her car to BPM for repairs. BPM discovered that the car’s on-board computer and cylinder illustration
head in the engine needed replacing. One K, an employee of BPM, contacted D to seek
approval for these repairs. K informed D that before the repairs could be carried out D was required
to sign a job card to authorise the repairs. D signed the job card as required. However, unbeknownst
to D the job card contained the following term:
‘I acknowledge that all vehicles and contents are left in the company’s custody, parked, stored and driven
entirely at owner’s own risk, and the company shall not be liable or responsible in any way for loss or
damage of whatsoever nature or howsoever caused, including loss or damage caused by the negligence
of the company’s servants, employees or agents or any other persons.’

When the repairs were completed, D went to collect her car from BPM. She had just paid a
sum in the region of R6000+ for the repairs when BPM’s manager informed her that her car was no
longer on the garage lot; her car had been stolen! Deeply upset by this unexpected event, D demanded
that BPM refund the money she paid for the repairs. BPM agreed and immediately refunded the
money.
A few days later, the car was recovered by the police. However, it was damaged. D took the
car to another dealership for repairs. On account of the theft, the car required R8000+ worth of
repairs. D paid for these.
After learning that D had recovered her car, BPM demanded that D pay R6000+ for the
repairs which it had carried out. D refused to pay. BPM issued summons in the magistrates’ court
against D for R6000+. In court, D denied that she was liable to pay BPM the R6000+. She also brought
a counterclaim. In her counterclaim, D claimed that she was entitled to the difference between what
she would have paid BPM and what she paid the second dealership for repairing her vehicle after it
had been stolen.
In the magistrates’ court BPM relied on the term in the job card to persuade the court that it was
not liable for any loss suffered by D as a result of the theft. Since D signed the job card, the magistrate

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held D to the terms of the job card. D was not only obliged to pay BPM, but D was also not entitled
to claim the difference between what was owed to BPM and what she paid the second garage
dealership. D appealed the decision of the magistrate to the High Court.
The High Court held that D was not bound to the term contained on the job card.59 The court
held that since K had specifically informed D that the purpose of signing the job card was to authorise
the repairs, D could not have reasonably anticipated that the job card would contain contractual
terms.60 D did not see the term, which was printed in small print at the bottom of the job card.
Furthermore, K made no attempt to draw D’s attention to the term. Relying on all of these
circumstances, the court found that D’s mistake was reasonable.61 BPM could not reasonably have
believed that D was genuinely agreeing to the terms of the clause in question merely because she
signed the job card.62
In Spindrifter (Pty) Ltd v Lester Donovan (Pty) Ltd 1986 (1) SA 303 (A), Spindrifter Case
was a clothing company which was owned by a Mr Levinson. Lester Donovan was a illustration
company that ran annual winter and summer fashion trade fairs in Cape Town. Lester
Donovan’s representative, one K, contacted Levinson and tried to persuade the latter into signing up
for a stand at a forthcoming summer trade fair. Levinson indicated that he was unable to sign up for
the trade fair but that he would visit the fair to see what it was all about. As promised, Levinson paid a
visit to the summer trade fair. Whilst there, K spotted Levinson and told him to sign up immediately
for the winter trade fair as there were limited stands available. Because of K’s persistent badgering,
Levinson signed up for the winter trade fair.
At the time of signing up for the winter trade fair, K specifically told Levinson that the winter
trade fair would be from 24-27 July 1981. What Levinson did not know was that the contract he had
signed contained a number of paragraphs in hard-to-read lettering on the reverse side of the page.
One of these terms stipulated that the trade fair organisers reserved the right to change the dates of
the trade fair. Another term stipulated that should the exhibitor not appear at the trade fair, he would
be liable for double the value of the contract price as a penalty for not showing.
In April 1981, Levinson received information that the dates of the trade fair had been changed
to 30 July 1981 – 1 August 1981. Levinson immediately informed Lester Donovan that he was
cancelling the contract as he had booked a trip abroad. Lester Donovan drew Levinson’s attention to
the terms of the agreement and when Spindrifter failed to show at the trade fair, Lester Donovan sued
Spindrifter for double the contract price in the High Court.
Spindrifter argued that it was unaware of the term in the contract entitling Lester Donovan to
unilaterally change the dates of the trade fair. Consequently, it argued that it was not bound by the
terms of the contract. The High Court did not agree. Relying on the caveat subscriptor principle, it
held Spindrifter to the terms of the contract.
Spindrifter took the matter on appeal to the Appellate Division. The court held that since all the
pre-contractual negotiations between the parties were premised on the fact that the exhibition would
take place between 24 July 1981 – 27 July 1981, coupled with the fact that K knew that Levinson (as
representative of Spindrifter) had not read the terms of the contract contained on the reverse side of
the page at the time of signature, meant that Levinson laboured under a reasonable mistake.63 The
court held that K should have drawn Levinson’s attention to the onerous terms, and by failing to do
so, the former had induced Levinson to labour under a mistake. Consequently, the court set the
contract aside.

59
At 527D.
60
At 526I-J.
61
At 527C-D.
62
At 527B-C.
63
At 319B-C.

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From the above discussion, it is evident that even without the CPA the common law was quite
equitable in its treatment of the consumer. However, the CPA does introduce further requirements
with regard to notices and contract terms. In terms of section 22 of the CPA, the producer of a notice
or document must produce that notice or document in ‘in plain language.’ A document is in plain
language if:

‘it is reasonable to conclude that the ordinary consumer of the class of persons for whom the notice,
document or visual representation was intended, with average literacy skills and minimal experience
as a consumer of the relevant goods or services, could be expected to understand the content,
significance or import of the notice, document or visual representation without undue effort, having
regard to –
(a) the context, comprehensiveness and consistency of the notice, document or visual
representation;
(b) the organisation, form and style of the notice, document or visual representation;
(c) the vocabulary, usage and sentence structure of the notice, document or visual representation;
and
(d) the use of any illustrations, examples, headings or other aids to reading and understanding.’

In cases of ambiguity, section 4(4) of the CPA provides:

‘To the extent consistent with advancing the purposes and policies of this Act, the Tribunal or court
must interpret any standard form, contract or other document prepared or published by and on behalf
of a supplier, or required by this Act to be produced by a supplier, to the benefit of the consumer-
(a) so that any ambiguity that allows for more than one reasonable interpretation of part of such a
document is resolved to the benefit of the consumer; and
(b) so that any restriction, limitation, exclusion or deprivation of a consumer’s legal rights set out in
such a document or notice is limited to the extent that a reasonable person would ordinarily
contemplate or expect, having regard to-
(i) the content of the document;
(ii) the manner and form in which the document was prepared and presented; and
(iii) the circumstances of the transaction or agreement.’

In the past, when a notice or document was ambiguous, the courts also tried to give the notice
or document a reasonable construction and often leaned (but not always) in favour of the consumer.
However, the Act makes it quite clear that ambiguity must be resolved in favour of the consumer.
There is thus greater need for service providers and goods suppliers to provide contracts which are
devoid of hidden meanings.
The caveat subscriptor principle is tapered even further by section 49 of the CPA. In terms of this
section a consumer who is going to be subject to any kind of risk or liability has a right to know of the
risk before entering into the transaction. Her attention must be drawn to the relevant clause by either
pointing out the terms or by setting out the terms in such a conspicuous manner so as to attract the
attention of an ordinary alert consumer. Where a transaction subjects the consumer to unusual risk
or to personal injury or even death, the consumer is expected to sign next to the risk clause or the
consumer must act in such as a manner as to indicate that she was aware of the risk, that she has
reconciled herself to the risk, and that she nevertheless has decided to assume the risk. Failure to
comply with the provisions of the Act will be mean that the consumer will evade the risk even if the
contract is signed at the end.

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Summary diagram

MISTAKE: RENDERS A
CONTRACT VOID IF

Common Unilateral Mutual

But watch out for But watch out for

Must be material and Must be material and caveat subscriptor
Must be material caveat subscriptor
reasonable reasonable
principle principle

It is important to also It is important to also

consider ss 41, 22 consider ss 41, 22
and 4(4) of the CPA and 4(4) of the CPA

(b) Misrepresentation

A misrepresentation is a false statement made at the time of entering into a contract. X intends to
purchase a house from Y. X asks Y about the state of the house’s plumbing. Y replies that the plumbing
is excellent. It later turns out that the plumbing is defective and that Y knew about the true condition
of the plumbing. Y’s statement constitutes a misrepresentation which would entitle X to repudiate the
contract and/or claim damages under the law of delict.64
It is important to distinguish between a misrepresentation and a warranty. A
warranty is a term in a contract in which a party expressly states that a particular state The distinction
of affairs exist. For example, if one were to take the aforementioned example of X between a
and Y: If the deed of sale contained a clause in which it was expressly stated that the misrepresentation
plumbing of the house was in a good condition, the clause would be a warranty. If it and a warranty
later turned out that the warranty was false, X would be able to sue Y for breach of
contract. Failure to comply with a warranty always gives rise to a claim for breach of contract.
However, in the case of misrepresentation, the false statement does not have to be entrenched in the
contract itself. It can be a mere oral statement that is falsely made at the time of negotiating the
contract.
A further distinction must be made between a misrepresentation and an opinion. For a
statement to constitute a misrepresentation, the guilty party must make the statement knowing full
well that it is false. An opinion on the other hand is not made with the intention to conceal a true fact,
and hence is not actionable. Going back to the example canvassed above, if Y were to tell X that for all
he knew the plumbing was sound because he had never experienced problems with the plumbing, this
would be an opinion if honestly made, and if it later transpired that the plumbing was defective, X
would have no action against Y.
Lastly, a distinction must be made between a misrepresentation and a puff. A puff is an
exaggerated statement which a reasonable person would know is not absolutely true but is part and
parcel of the pitch to conclude a particular type of contract. One often comes across advertisements
in newspapers where estate agents invite offers on properties which boast ‘the best views in Cape
Town’ or which constitute the ‘crème de la crème of the property market’. Most people know that

64
See also section 41(3) of the CPA.

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they cannot rely on such puffs because they are not really true; they are simply part of the sales game.
In the past, whenever information was presented in a manner suggesting a quality that was too good
to be true, then it was too good to be true and consequently, our law did not provide a remedy to a
person who was silly enough to contract on the basis of the exaggerated statement. However, under
the CPA service providers and suppliers of goods can attract liability for using puffs. Section 4(5)
provides:
‘In any dealings with the consumer in the ordinary course of business, a person must not-
(a) engage in any conduct contrary to, or calculated to frustrate or defeat the purposes and policy of,
this Act;
(b) engage in any conduct that is unconscionable, misleading or deceptive, or that is reasonably likely to
mislead or deceive; or
(c) make any representation about a supplier or any goods or services, or a related matter, unless the
person has reasonable grounds for believing that the representation is true.’ (italics inserted for
emphasis)

Section 29 provides:
‘A producer, importer, distributor, retailer or service provider must not market any goods or
services—
(a) in a manner that is reasonably likely to imply a false or misleading representation concerning
those goods or services, as contemplated in section 41; or
(b) in a manner that is misleading, fraudulent or deceptive in any way, including in respect of—
(i) the nature, properties, advantages or uses of the goods or services;
(ii) the manner in or conditions on which those goods or services may be supplied;
(iii) the price at which the goods may be supplied, or the existence of, or relationship of the price
to, any previous price or competitor’s price for comparable or similar goods or services;
(iv) the sponsoring of any event; or
(v) any other material aspect of the goods or services.’

To emphasise the point, section 41 of the CPA provides further:

‘In relation to the marketing of any goods or services, the supplier must not, by words or conduct-

(a) directly or indirectly express or imply a false, misleading or deceptive representation concerning a material
fact to a consumer;
(b) use exaggeration, innuendo or ambiguity as a material fact, or fail to disclose a material fact if the failure
amounts to a deception; or
(c) fail to correct an apparent misapprehension on the part of the consumer, amounting to a false, misleading
or deceptive representation,
or permit or require any other person to do so on behalf of the supplier.’

So, one sees the importance of distinguishing between misrepresentations, opinions,

warranties and puffs. Warranties are actionable as a matter of course. Opinions are not. And,
misrepresentations may be actionable (provided that all the requirements are met). Puffs were not
actionable in the past, but may be under the CPA as they may be viewed as devices to mislead the
consumer when the supplier knows full well that she cannot meet the promises made.
Let us consider misrepresentation more closely. A misrepresentation can be made expressly
or tacitly: for example, in the case of X and Y above, where Y states that the plumbing is in a good state
and it later turns out not to be the case, this is an express misrepresentation. But, a misrepresentation
can also be made tacitly, for example by keeping silent when there is a duty to speak, or by conduct.
Thus when a prospective purchaser comes to a car dealer and informs the latter that she seeks to
purchase a car that is not older than 5 years, the car dealer would be obliged, when showing cars to

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the purchaser, to mention the age of the car. In this case there is a duty to speak. Were the car dealer
not to utter any actual words and were he to simply make a hand gesture pointing out cars in the lot,
the hand gesture would be sufficient to create reliance in the mind of the purchaser that the cars
pointed out are not older than 5 years. If it later turns out that the car purchased is older than 5 years,
the purchaser will successfully be able to argue that there was a misrepresentation by conduct.
A positive duty to disclose information where no questions are asked, or where no
information is given, arises in exceptional cases only and then, too, there is no litmus test; it all
depends on the facts of a case. Of course, if an offeree asks an offeror a question, the latter should
respond truthfully. Failure to do so would amount to express misrepresentation. However, where the
offeree does not ask a question, the offeror may be required to volunteer information if he knows that
the information is such that it may dissuade the offeree from entering into the contract. If X buys Y’s
farm and Y knows that the farm has been earmarked by the local municipality for partial expropriation
in order to make space for a railway which the municipality intends to lay across the farm, this is
material information and should be disclosed. The railway line threatens future enjoyment of the
farm. It may also interfere with the economic viability of the farm. Hence, this is information that must
be disclosed. There is thus a duty to speak even if no questions are asked. In another case the court
ruled that a seller of immovable property had a duty to disclose that there was a graveyard situated on
the property.
Our courts have held that where an offeree asks a question while the contract is being
negotiated, and the offeror answers truthfully, but circumstances change before the contract is
concluded, the offeror has a duty to disclose the changed circumstances to the offeree. If X asks Y
about the state of the plumbing in a house that X seeks to purchase from Y, and Y answers truthfully
that the plumbing is satisfactory, but the plumbing becomes unsatisfactory shortly after this – but
before the sale is concluded – Y owes X a duty to disclose the changed condition of the plumbing
before the contract is formally concluded. Failure to do so will result in a misrepresentation. Any
person, these days, who intends to enter into any sort of sale agreement will be well advised to read
section 41 of the CPA, because this section places a positive obligation on a supplier to volunteer
various types of information.
Every misrepresentation is either causal or incidental. A causal misrepresentation is a
misrepresentation which induces a contract – had the misrepresentation not existed the innocent
party would not have entered into the contract in question. An incidental misrepresentation is a
misrepresentation which would not have affected the parties’ decision to enter into the contract – the
parties would nevertheless have entered into a contract, but on different terms.
Aside from a misrepresentation being causal or incidental, a misrepresentation can either be
fraudulent, negligent, or innocent. A fraudulent misrepresentation is one made intentionally; a negligent
misrepresentation is one made unintentionally, but where it can be shown that objectively speaking a
reasonable person would have taken steps to ensure the accuracy of the information that he or she
was imparting before making certain statements; and an innocent misrepresentation is one made
unintentionally and where it can be shown that a reasonable person would not have taken steps to
check the accuracy of the statements that he or she was making.
All misrepresentations are actionable in law. In such cases the contract is considered voidable
and hence can be set aside at the election of the innocent party. When the contract is set aside it is
necessary for both parties to make restitution. This means that each party must return (or give the
monetary equivalent of) the performance that he or she has received in terms of the contract up to
that point in time. In addition, if the misrepresentation is fraudulent or negligent the innocent party
will be able to sue in the law of delict for damages because a fraudulent or negligent misrepresentation
is considered a wrong for the purposes of the law of delict. An innocent misrepresentation, on the other
hand, entitles the other party (i.e. the party who did not commit the misrepresentation) to set aside

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the contract in which case both parties must make restitution, but does not give rise to a delictual
claim for damages because an innocent misrepresentation is not considered an actionable wrong for
the purposes of the law of delict.

(c) The relationship between mistake and misrepresentation

Logically speaking every misrepresentation gives rise to a mistake, provided, of course, that the
innocent party genuinely believes the misrepresentation. As such, there is the possibility that a
misrepresentation may actually render a contract void for mistake.
As noted in the discussion above, in order for a unilateral or mutual mistake to render a
contract void, the mistake has to be (a) reasonable and (b) material. A misrepresentation will, as a
matter of course, give rise to a reasonable mistake. However, not every misrepresentation will be so
material (such that it goes to the root of the contract). For what is considered a material mistake, see
the discussion above when we considered the distinction between material versus non-material
mistakes. If a misrepresentation gives rise to a material mistake, the contract is void. However, if a
mistake is not material, the contract will not be void for mistake but may nevertheless be voidable on
the basis of misrepresentation.

Summary diagram

(See next page)

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Mispresentation renders a
contact voidable if:

There is express or tacit

If intentional or negligent, misrepresentation brought
then restitution plus delictual about even by changed
damages circumstances
One must also keep in mind
the provisions of section 41
of the CPA

If innocent, then restitution The misrepresentation is

must take place causal or incidental

It does not matter if the

misrepresentation is innocent,
intentional (fraudulent) or
negligent

(d) Duress or Undue Influence

Like misrepresentation, duress renders a contract voidable. Duress refers to the situation where
someone coerces, intimidates or threatens another to enter into a contract. A threat can be directed
towards one’s person, property, reputation or even towards a third party. As long as the threat is not
trivial and the innocent party reasonably believes it will be carried out, there is duress.
As regards threats directed to one’s property, the courts require the innocent party to, at least,
protest to the duress at the time when entering into the contract. But where life and limb is at stake,
protest is not required. Consider the case of Blackburn v Mitchell (1897) 14 SC 388. In this Case
case a ship ran aground in Table Bay Harbour on a stormy night. The ship had cargo on illustration
board to the value of £6000 and was considered to be in a state of ‘great peril and danger.’ A
tug boat owner came by with his tug and offered to run the ship afloat for the exorbitant price of £2000.
The master of the ship protested, but realised that if he did not accept the price the ship would sink
and with it all the cargo would be lost. So, he accepted the offer with much protest and great
reluctance. The tug boat owner saved the ship and when the time came to pay, the master of the ship
refused to pay. The matter went to court and the court held that since the crew was not at risk, this
was a matter involving duress to save property. Since the master of the ship had registered a protest,
the court held, the contract was voidable at the election of the innocent party. However, since the tug

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owner had brought an alternative claim (just in case he did not succeed on the contract claim) for
reasonable remuneration for services rendered, the court awarded him £1000 as reasonable
compensation for saving the ship.
Undue influence is more subtle than duress. It involves a situation where a party exploits a
relationship of dominance and dependence that has developed between himself and another party.
Thus a doctor who enters into a contract with a patient, knowing the latter to be emotionally
vulnerable to her suggestions, would be committing an act of undue influence in
contradistinction to perpetrating duress. In Preller v Jordaan 1956 (1) SA 483 (A), an aged Case
farmer, Jordaan, donated four farms to his doctor, Preller. It turned out that Jordaan was illustration
frail with illness and he was emotionally weak. Preller prayed on his patient’s weakness to
persuade him to donate the farms to him with the promise that Preller would look after Jordaan’s wife.
The farms were eventually transferred to Preller. Later Jordaan sought an order for the return of his
farms citing the doctor’s undue influence as the cause of the donations and transfer. The Appellate
Division found that indeed Preller had used his position to induce Jordaan to donate the farms to him.
Normally undue influence renders a contract voidable at the election of the innocent party
with the concomitant obligation that each party makes restitution of any benefits received in terms of
the contract. However, there was a sting in the tail in the case of Preller v Jordaan. It seems that before
the matter came to court, Preller had transferred three of the four farms to his children. He retained
only one farm for himself. The children were innocent of Preller’s scheme. The question thus arose
whether the children were liable to return the farms. The court held that once property is transferred
to an innocent third party, one cannot recover the property from the third party because the third
party acquires title in good faith. Jordaan could therefore only recover the one farm still in the name
of Preller. Jordaan could not recover the farms already transferred to the children. However, the
decision of the court did not exclude the possibility of Jordaan suing Preller in the law of delict for the
damages sustained by the former as a result of the latter’s wrongful act, resulting in the loss of the other
three farms.

F. ILLEGAL CONTRACTS

A contract which is contrary to statute or the common law may be void. Not every contract which is
contrary to an Act of Parliament is void, but every contract which is declared contrary to the common
law will, as a necessary implication of the court’s order, be regarded as void.

(a) Statutory illegality

Sometimes a statute will stipulate that a contract entered into in contravention of a statute is void. For
example, the Sexual Offences Act 23 of 1957 provides that a contract to let a house for use as a brothel
is void.65 On other occasions, the statute will provide that the prohibited contract is valid despite
statutory contravention but that the parties are subject to some other penalty for not complying with
the statute. To this extent see the Long-term Insurance Act 52 of 199866 and the Short-term Insurance
Act 53 of 1998,67 which provide that insurance policies entered into in contravention of the respective
Acts will not necessarily be invalid unless the contract can be set aside on some other ground such as
material mistake etc.68

65
Section 5.
66
Section 60.
67
Section 54.
68
These particular sections were amended by the Financial Services Laws General Amendment Act 45 of 2013, but it
would appear that the amendments do not affect what is stated here in the notes.

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Where a statute contains a clear stipulation as regards the effect of a contract in contravention
of the statute, the courts will apply that stipulation. However, where the statute is silent on the
issue of validity, the courts will use their discretion in deciding whether the contract is void. Case
In Palm Fifteen (Pty) Ltd v Cotton Tail Homes (Pty) Ltd 1978 (2) SA 872 (A), the court laid illustration
down the following golden rule in such instances:
‘There is no rule of thumb; [the court will look at] the subject-matter of the prohibition, its purpose in the
context of the legislation (or any provisions having the force of law), the remedies provided in the event of any
breach of the prohibition, the nature of the mischief which it was designed to remedy or avoid and any cognizable
impropriety or inconvenience which may flow from invalidity… [these] are all factors which must be considered
when the question is whether it was truly intended that anything done contrary to the provision in question was
necessarily to be visited with nullity.’69

(b) Common-law illegality

A contract is unenforceable according to the common law when it is against public policy. As noted
in chapter one, public policy is not a static concept. It is determined by the legal convictions of society
and, in more recent times, by the aspirational values of the Constitution.
A contract for the perpetration of a crime is clearly against public policy. If a person entered
into an agreement to have someone killed, the agreement itself will give rise to the crime of conspiracy
to commit murder and the agreement, consequently, will be against public policy and hence
unenforceable. But even if a particular act is not a crime in the eyes of the law, it may nevertheless be
considered contrary to public policy if the common law (Roman-Dutch law) considers the contract
to be distasteful. Thus one cannot contract out of one’s obligation to maintain one’s children. Such a
contract is unenforceable according to the common law. Furthermore, one cannot contract in a
manner calculated to disrupt a marriage. Thus if a person promises to divorce his spouse in terms of a
contract, such a contract will be unenforceable. In the past one could not enter into any sort of
gambling and betting arrangements. This, of course, has changed with the proliferation of legislation
permitting gambling in South Africa. This shows how something regarded as abhorrent by the
common law has achieved moral acceptance because the law supports the type of conduct.
The residual power conferred by the CPA on courts to declare contracts void for being unfair
may seem revolutionary, but the reality is that the courts possessed the power to strike down harsh
contracts for more than 20 years. The difference, however, is that whereas in the past the courts’ power
was reserved for exceptional cases, the CPA expects the courts to exhibit greater activism. In the past,
our courts could declare a contract void if it was against public policy for being prejudicial or harsh.
However, because the courts were generally cautious about intruding too much on freedom of
contract they exercised their power in rare and clear cases. Before the courts would strike down a
contract for being harsh, the party seeking the order had to show that she suffered ‘manifest prejudice’
as a result of the contract.
Entering into a bad deal was not necessarily indicative of ‘manifest prejudice’. Thus the sale
of a car for two or three times its market value was not indicative of manifest prejudice to the Case
purchaser. However, selling yourself into slavery was. In Sasfin v Beukes 1989 (1) SA 1 (A), illustration
Beukes, an anaesthetist, took a loan from Sasfin, a company carrying on business as a financier.
To secure the loan, Beukes signed over all his present and future book debts to Sasfin. The cession
was worded so widely that it would have operated even after Beukes had satisfied the debt. The terms
of the cession were such that it had the potential of rendering Beukes an economic slave, depriving

69
At 885E-G.

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him of any means to support himself and his family. On the facts, the Appellate Division declared the
contract to be against public policy and hence void.70
With the advent of the CPA the circumstances under which a contract can be set aside for
being unfair are considerably wider. Because this discussion is very important, the provisions of the
CPA on this point will be discussed in more detail later.
It is interesting to note that contracts in restraint of trade have not been declared contrary to
public policy. A restraint of trade agreement is a contract in terms of which an employee agrees that
when she leaves her employer, she will not work for a competitor for a particular period of time or that
she will not carry on the same trade for a particular period within a specific geographical area. At first
blush these contracts seem rather harsh as they prevent people from earning a livelihood. However,
our courts have said that such contracts are not automatically unenforceable unless the employee can
show that the restraint is unreasonable. In determining whether a restraint is unreasonable the courts
will consider the following factors:
• The particular business interest that the restraint seeks to protect;
• Whether the business interest is worthy of protection;
• Whether the restraint is necessary to achieve that protection;
• Whether the restraint operates only to ensure the necessary level of protection;
• The breadth of the restraint having regard to the activities covered by it;
• The lifespan of the restraint; and
• The geographical area over which it will operate.
Having regard to these factors it is easy to see why a restraint preventing an investment analyst
from practising his or her profession for 6 months within a particular geographical area may be
considered acceptable, but a restraint preventing the analyst from carrying on his profession anywhere
in the Republic for 5 years would not be. When a court finds a restraint to be against public policy, the
court will not substitute the terms of the restraint with a more palatable version. The court will simply
strike down the entire restraint clause.
The precise impact of the Constitution in the area of contract is not well-defined in our law.
This, however, is not a major problem. With the advent of the CPA it may be the case that we do not
have to rely that much on the Constitution to carve out better principles of contractual fairness. To
illustrate this point, take the following example: X, the tenant, concludes a lease agreement with Y, the
landlord, in terms of which X is prohibited from allowing a black person to share the premises with
him as a flat mate. The clause in the contract is clearly offensive to contemporary values of public
policy as informed by the Constitution. This is so because the Constitution does not permit
discrimination on the basis of race. However, these days it is not even necessary to refer to the
Constitution when making an argument in court as section 8 of the CPA prevents a supplier from
unfairly discriminating against consumers on any of the listed grounds of discrimination contained in
the Constitution.
The application of the Constitution to the law of contract is at best tenuous. It requires a court
to get involved in the very difficult exercise of weighing competing interests. At face value one may
think that a constitutional right should always override a commercial interest. However, because the
Constitution applies to juristic persons as well, the courts find it really difficult to balance the interests
of the individual with that of a commercial enterprise. Take the example of X who enters into an
agreement with a hospital in terms of which it is agreed that the hospital would perform a much
needed medical procedure on X to save the his life, but it is also agreed that the hospital or its
employees (medical or administrative) would not be liable for harm suffered by X arising from the

70
At 15H-I; 18G-H.

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negligence of the hospital’s employees – would such an exclusion of liability clause be valid? In terms
of the common law, such exclusion of liability clauses are not considered as being against public
policy. What about under the constitutional value system? Can one not say that the clause, as outlined
above, is offensive because the Constitution protects the right to bodily integrity and the clause has
the effect of running roughshod over that right by permitting a hospital to exculpate itself from
liability? Well, this very question, with similar facts, came before the Supreme Court of Appeal in the
case of Afrox Healthcare Bpk v Strydom 2002 (6) SA 21 (SCA). In this case the court held that the
exclusion clause was not inconsonant with the values of the Constitution. The court balanced the
interests of the health care sector with those of the individual and found that the interests of the
individual in this case were secondary. The court was criticised for allowing the principle of freedom
of contract to trump the constitutional value system.
It is very interesting to note that in terms of Regulation 44(3)(a) passed in terms of the CPA
a term in a contract is presumed to be unfair if it has the purpose or effect of ‘excluding or limiting the
liability of the supplier for death or personal injury caused to the consumer through an act or omission
of that supplier…’ It goes without saying that the reference to ‘supplier’ in terms of the section
includes services rendered by employees and agents of that supplier. This does not mean that a
commercial enterprise will never be able to exclude liability for death or injury; it simply means that
it will bear the onus of satisfying the court that that type of exclusion is fair in the circumstances. The
fact that the CPA takes a different approach to the decision in Afrox does not reflect a problem with
the judicial system. It simply shows that the legislature, which has much greater resources at its
disposal than the courts, investigated the matter and determined that it is in the best interests of
society to have better protection against this type of exclusion of liability clause.

(c) The consequences of an illegal contract

The maxim in pari delicto potior est conditio possidentis applies. This maxim means: ‘in equal guilt, the
position of the possessor is stronger.’ The practical application of this maxim is as follows: Say X
contracts with Y to assassinate Z. X pays Y a deposit of R10 000 to do the dastardly deed. After
payment, Y has a change of heart and does not follow through. X cannot hope to recover the R10 000
by way of an enrichment claim. This is so because he has entered into an illegal contract. To recover
performance you must have clean hands. Since X’s hands are tainted with illegality he cannot expect
the law to assist him. The law punishes him by rendering the contract void and also by preventing him
from recovering his performance.
To rebut the general rule and accordingly, the in pari delicto potior est conditio possidentis
maxim, a party must show that he was not equal in guilt. If he can do this the court will come to his
rescue and permit him to recover performance. Also, if the court finds that it is in the interests of
justice to permit a guilty person to recover his performance, the court may yet order restitution of
performance. Whether or not the exception applies depends on the facts of a particular case and the
circumstances under which the illegality occurred.

(d) The principle of severability of terms

If a contract read as a whole is illegal, the entire contract is void. However, there may be instances
where a contract could relate to a number of things. If this is the case, then the principle of severability
may apply. According to this principle, if it is possible to sever the illegal terms of the contract from
the acceptable terms and the contract still makes sense in respect of those aspects not affected by the
illegal terms, the court will simply sever the illegal terms and uphold the rest of agreement. Going back
to our assassination pact example between X and Y: If the assassination agreement also contains a

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term in which X agrees to sell his car to Y, then that part of the agreement, as far as the sale of the car
is concerned, stands, despite the assassination pact contained in other parts of the contract.

G. UNFAIR CONTRACTS UNDER THE CPA

As noted earlier, harsh contract terms are now treated by the CPA. The CPA deals with this matter
much more liberally than the common law ever did. To this extent, sections 48 and 52 of the CPA
are instructive. In terms of section 48(1):
‘A supplier must not—
(a) offer to supply, supply, or enter into an agreement to supply, any goods or
services—
(i) at a price that is unfair, unreasonable or unjust; or
(ii) on terms that are unfair, unreasonable or unjust;
(b) market any goods or services, or negotiate, enter into or administer a transaction or an agreement for the
supply of any goods or services, in a manner that is unfair, unreasonable or unjust; or
(c) require a consumer, or other person to whom any goods or services are supplied at the direction of the
consumer—
(i) to waive any rights;
(ii) assume any obligation; or
(iii) waive any liability of the supplier,
on terms that are unfair, unreasonable or unjust, or impose any such terms as a condition of entering
into a transaction.’

According to section 52:

‘(1) If, in any proceedings before a court concerning a transaction or agreement between a supplier and
consumer, a person alleges that—
(a) the supplier contravened section … 48; and
(b) this Act does not otherwise provide a remedy sufficient to correct the relevant prohibited conduct,
unfairness, injustice or unconscionability,
the court, after considering the principles, purposes and provisions of this Act, and the matters set out in
subsection (2), may make an order contemplated in subsection (3).
(2) In any matter contemplated in subsection (1), the court must consider—
(a) the fair value of the goods or services in question;
(b) the nature of the parties to that transaction or agreement, their relationship to each other and their
relative capacity, education, experience, sophistication and bargaining position;
(c) those circumstances of the transaction or agreement that existed or were reasonably foreseeable at
the time that the conduct or transaction occurred or agreement was made, irrespective of whether this
Act was in force at that time;
(d) the conduct of the supplier and the consumer, respectively;
(e) whether there was any negotiation between the supplier and the consumer, and if so, the extent of
that negotiation;
(f) whether, as a result of conduct engaged in by the supplier, the consumer was required to do anything
that was not reasonably necessary for the legitimate interests of the supplier;
(g) the extent to which any documents relating to the transaction or agreement satisfied the
requirements of section 22;
(h) whether the consumer knew or ought reasonably to have known of the existence and extent of any
particular provision of the agreement that is alleged to have been unfair, unreasonable or unjust, having
regard to any—
(i) custom of trade; and
(ii) any previous dealings between the parties;
(i) the amount for which, and circumstances under which, the consumer could have acquired identical
or equivalent goods or services from a different supplier; and
(j) in the case of supply of goods, whether the goods were manufactured, processed or adapted to the
special order of the consumer.

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(3) If the court determines that a transaction or agreement was, in whole or in part, unconscionable, unjust,
unreasonable or unfair, the court may—
(a) make a declaration to that effect; and
(b) make any further order the court considers just and reasonable in the circumstances, including, but
not limited to, an order—
(i) to restore money or property to the consumer;
(ii) to compensate the consumer for losses or expenses relating to—
(aa) the transaction or agreement; or
(bb) the proceedings of the court; and
(iii) requiring the supplier to cease any practice, or alter any practice, form or document, as
required to avoid a repetition of the supplier’s conduct.
(4) If, in any proceedings before a court concerning a transaction or agreement between a supplier and a
consumer, a person alleges that an agreement, a term or condition of an agreement, or a notice to which a
transaction or agreement is purportedly subject, is void in terms of this Act or failed to satisfy any applicable
requirements set out in section 49, the court may—
(a) make an order—
(i) in the case of a provision or notice that is void in terms of any provision of this Act—
(aa) severing any part of the relevant agreement, provision or notice, or alter it to
the extent required to render it lawful, if it is reasonable to do so having regard to
the transaction, agreement, provision or notice as a whole; or
(bb) declaring the entire agreement, provision or notice void as from the date that
it purportedly took effect; or
(ii) in the case of a provision or notice that fails to satisfy any provision of section 49, severing
the provision or notice from the agreement, or declaring it to have no force or effect with
respect to the transaction; and
(b) make any further order that is just and reasonable in the circumstances with respect to that
agreement, provision or notice, as the case may be.’

It is evident that the provisions above are couched in wide, open-ended language. We are not
told what constitutes an unfair price, for example. This will depend on the circumstances of a case and
the subject matter of the transaction. One is not given an exhaustive list of unfair contract terms. This
is something that will be worked out in the future by the National Consumer Commission and the
courts as and when they are confronted by different contract terms. For the moment, all that we have
are those so called ‘grey contract terms’ contained in clause 44 of the Regulations passed in terms of
the Act. But even that list is not exhaustive. Section 52(2) tells the courts what factors they must
consider when rendering a verdict on whether a contract is harsh, unreasonable, or unjust. We do not
know what weight the courts will give to these factors. Will some factors be considered more important
than others? Subsections (3) and (4) of section 54 deal with the question of remedies where injustice
or harshness is shown to exist. How the courts will come to view these provisions is also anyone’s
guess. As the courts render more and more decisions, greater clarity will be obtained. For the moment
it is important for all of us to be cognisant of the provisions of the Act and to reflect thereon when we
enter into transactions either as suppliers or as consumers.

H. SUPERVENING IMPOSSIBILITY

If performance is impossible, this, too, may render a contract void. Working out when a contract is
void for impossibility can be quite a tricky business. There is general consensus that events
characterised as `acts of God’ render contracts impossible to perform. If X agrees to sell Y all the wheat
reaped on his farm in a given year and X is unable to fulfil the agreement because a plague of locusts
ravages X’s fields before the wheat is reaped, performance is impossible as this is viewed as an act of
God. The same will apply in the case of famine, flood, draughts, storms, etc.
Despite this seemingly easy principle, there are cases when it is hard to determine whether
performance is impossible. If a landlord rents a flat to a tenant, and the flat burns down, the landlord

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cannot be blamed (unless, of course, the landlord burnt down the flat deliberately). The tenant will
not be able to insist on performance because, objectively speaking, the landlord cannot perform even
if the landlord wanted to. However, a tenant who loses his job resulting in his inability to pay rent
cannot rely on the defence of impossibility of performance to get out of her contractual obligations.
In this case, her inability to perform is said not to be objectively created, but subjectively created. She
must find another job, borrow the money or take out a loan to pay the rent. But what about the
situation where a builder is contracted to build a house and subsequently slips, resulting in her being
hospitalised, thereby preventing her from completing the house? Can one say that the inability to
perform lies subjectively with the builder? Or will one say that the inability to perform is objectively
impossible? Here the law is less certain.
Whenever the law views performance as impossible, the contract is void. As such the parties
are required to return any performance made in terms of the contract, unless the contract specifies
otherwise. There is also no claim for damages in either the law of contract or the law of delict.

I. FORMALITIES
The general rule is that no formalities are required for the creation of a valid contract. A contract can
be oral or in writing. There is no requirement for a contract to be signed by the parties or by witnesses.
As long as the parties can prove the terms of the contract, the contract will be enforced.
The aforementioned general rule does not apply where a statute provides for formalities.
There are not many statutes that do this. By way of example, let us look at three statutory instances.
The Alienation of Land Act 68 of 1981 states that contracts for the sale of immovable property
must be in writing and must be signed by both parties. If these formalities are not complied with, the
contract is void.71
The Deeds Registries Act 47 of 1937 provides that an antenuptial contract must be recorded
in writing and signed by both parties in front of a notary public.72 If these formalities are not complied
with, creditors may treat the parties as if they are married in community of property, in which case
they will be jointly and severally liable for each other’s debts.73 However, as between the couple
themselves, the antenuptial contract will still be binding.
In terms of the General Law Amendment Act 50 of 1956, a contract of suretyship will be
invalid unless the terms thereof are embodied in a written document signed by, or on behalf of, the
surety.74
The CPA has several provisions dealing with formalities. For example, a franchise agreement
has to be in writing and must be signed by or on behalf of the franchisee.75 The Act also provides that
all exclusion clauses, limitations of risk or liability clauses, clauses where the consumer indemnifies
the supplier or clauses where certain facts have been acknowledged by the consumer, must be in
writing.76 It is no longer proper to simply inform someone orally that is subject to usual risk or that he
could be subject to injury or death. His or her attention must be drawn to a written notice expressing
such likelihood and where possible, the notice must be signed or initialled by the consumer.

71
Section 2(1).
72
Section 87.
73
Section 86.
74
Section 6.
75
Section 7.
76
Section 49(1) read with section 49(3).

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J. CONTENTS OF A CONTRACT

People colloquially talk about the terms of a contract when referring to the contents of a contract.
However, the law distinguishes between different types of terms: i.e. express terms and implied terms.

(a) Express Terms

Express terms are those terms specifically agreed to by the parties. In an oral contract, these terms are
expressed aloud by the parties. In a written contract, these are expressed in the words of the contract.
Despite the fact that express terms are in black and white in written contracts, people do not
always know of their existence. People often do not read contracts. Therefore, although a term may be
expressly stated in a contract, it is quite conceivable for a party not to be subjectively aware of its
existence. Earlier in this chapter the caveat subscriptor principle was discussed. You will recall that when
someone signed a contract, she was generally bound to the terms of the contract even if she did not
read the contract. However, it will also be recalled that in cases such as Dlovo v Brian Porter Motors t/a
Port Motors Newlands (discussed above) the courts held that the caveat subscriptor principle can be
relaxed if a signed contract contains a particularly onerous term which a reasonable person would not
have expected to find in a contract of the type in question.
As mentioned earlier, standard form contracts are commonplace these days. If one opens a
bank account one is handed a standard form contract. If one applies for credit facilities one is usually
supplied with a standard form contract. Even when one registers as a student at the University of Cape
Town, one is expected to sign a standard form contract. The situations where one can expect to be
presented with a standard form contract are endless. Often people sign these contracts without even
reading them. In all such instances, people are bound by the express terms of those contracts even if
they have never subjectively reconciled their minds to the actual terms of those agreements. This is
because one can be bound to the express terms of a contract without having known of its existence, let
alone signing it.
How often does one see signs posted in car parks where motor vehicle owners are cautioned
to park their cars at ‘own risk’? When you next visit the gym, note the sign at the entrance exculpating
the owners and staff of the gym for any loss, injury or damage suffered by any member. Purchase a
ticket to the circus and chances are that on the reverse side of the ticket there will be clauses
protecting the circus from liability in the event of an elephant going on the rampage. The list of What are
instances when standard form contracts can be, and are, used is endless. Be that as it may, clauses exclusion
absolving a party from liability are called ‘exclusion clauses’. They are couched in wide terms clauses?
offering the widest coverage from liability. For a person entering a car park, gym or circus the terms
contained on signs and tickets constitute express and binding contractual terms. As long as the service
provider can show that it did everything reasonably possible to bring the term to the attention of the
consumer, the consumer will be bound.
To illustrate the above principle, consider the following story of woe. In Durban’s Case
Water Wonderland (Pty) Ltd v Botha and Another 1999 (1) SA 982 (SCA), a mother and illustration
her two-and-a-half-year-old daughter (the Bothas) were seriously injured on a visit to the
Durban’s Water Wonderland fun park. Whilst mother and daughter were on a fun ride known as the
‘jet ride’ (which consists of twenty arms with seats at the ends) the hydraulic valves controlling the
arm on which they were seated malfunctioned. The arm flung them up and down uncontrollably,
resulting in the two ill-fated thrill seekers being hurled into a flower bed many metres away. They
sustained serious injuries. Investigations revealed that the hydraulic system failed because of a design
flaw, and that the chair on which they sat had broken loose because it was not properly bolted down
to the arm. The Bothas sued Durban’s Water Wonderland for their injuries on the basis that it was
negligent for not ensuring that the seats were properly bolted.

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Durban’s Water Wonderland argued that it was not liable. It turned out that there were 80 cm
by 60 cm notices on several cashiers’ window panes in individual white lettering of 2.5 cm which read:
‘The amenities which we provide at our amusement park have been designed and constructed to the best of our
ability for your enjoyment and safety. Nevertheless, we regret that the management, its servants and agents, must
stipulate that they are absolutely unable to accept liability or responsibility for injury or damage of any nature
whatsoever whether arising from negligence or any other cause howsoever which is suffered by any person who
enters the premises and/or uses the amenities provided.’77

The Supreme Court of Appeal held that since these notices:

• were prominently displayed at a place where one would ordinarily expect to find such notices;
• were readily visible;
• contained writing that was easily legible; and
• were such that a reasonable person could easily observe them,
one was led to the inescapable conclusion that Durban’s Water Wonderland had done everything
reasonably possible to bring the exemption clause to the attention of its patrons.78 When the Bothas
purchased their entry to the ride, they entered into a contract by expressly accepting the terms of
notice. As such, Durban’s Water Wonderland was not liable for injuries suffered by the Bothas.
While the CPA does not declare standard term contracts void, it does supplement some of the
protections offered to consumers under the common law. These are contained in section 49, which
was discussed above. It is interesting to note that if the Wonderland case was decided today, a court
may well arrive at a different conclusion. Firstly, a term which imposes risk of physical harm or even
death needs to be clearly spelt out.79 Failure to do so will result in the supplier being liable. Secondly,
where a contract imposes such a risk, the consumer’s attention must be specifically drawn to the
possibility.80 Thirdly, a clause in a contract which limits liability for injury or death to a consumer is
presumed to be unfair.81 The onus is on the supplier to show that the contract is fair having regard to
the nature of contract, the service rendered, and the respective positions of the parties.

(b) Implied Terms

There are three types of implied terms:

(i) terms implied by law
(ii) terms implied by the facts
(iii) terms implied by trade usage

(i) Terms implied by law

Terms implied by law are those terms which form part of substantive law in specific types of contracts.
To override these terms, the parties must expressly provide to the contrary in an agreement.
In terms of the common law it was always the case that once a sale was concluded, the risk of
damage to property was borne by the purchaser even if the property had not been delivered to the
purchaser. This rule had its origins in Roman law. Parties were always free to specify in a sale contract
that risk would only pass when the property was delivered to a purchaser. The CPA takes a more
common sense approach. Section 19(2) states:

77
At 988C-E.
78
At 992B-D.
79
Section 49(2).
80
Section 49(2).
81
Regulation 44(3)(a).

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‘Unless otherwise expressly provided or anticipated in an agreement, it is an implied condition of every

transaction for the supply of goods or services that—

(a) the supplier is responsible to deliver the goods or perform the services—
(i) on the agreed date and at the agreed time, if any, or otherwise within a reasonable
time after concluding the transaction or agreement;
(ii) at the agreed place of delivery or performance; and
(iii) at the cost of the supplier, in the case of delivery of goods; or
(b) the agreed place of delivery of goods or performance of services is the supplier’s place of
business, if the supplier has one, and if not, the supplier’s
residence; and
(c) goods to be delivered remain at the supplier’s risk until the consumer has accepted
delivery of them, in accordance with this section.’

(ii) Terms implied by the facts

Terms implied by the facts are also known as ‘tacit terms’. Tacit terms are unspoken terms which both
parties or one of the parties allege form part of their contract. A court will not lightly read a tacit term
into a contract. It will look at the express terms of a contract and the surrounding circumstances of a
case in order to determine whether the parties would have intended for the alleged term to form part
of their contract.
In deciding whether a tacit term forms part of a contract the courts apply the test of the
‘curious bystander’. In applying the test the court asks itself: ‘What if at the time when the contract was
concluded there was a curious bystander present, and the latter noting a gap in the contract said to the
parties: “what will you do in this situation?” If both parties would have given the same answer, then
the common answer will be a tacit term of the contract.’ Of course, this test is fictitious. It is simply a
convenient method of reasoning; in a case where a tacit term is alleged the court projects a possible
outcome.
In Voigt Ltd v South African Railways Ltd 1933 CPD 4, the South African Railways Case
placed an advertisement in a newspaper offering for sale by tender an old marine boiler. illustration
The advert indicated that the sale of the boiler would take place ‘Free on Rail, Cape Town
Harbour.’ What this meant was that the Railways would deliver the boiler to a rail truck in the Cape
Town harbour. V saw the advert and tendered £30 for the boiler. The Railways accepted the tender.
However, when it came time to transport the boiler the Railways realised that the boiler was too big
and heavy. The only way that it could transport the boiler was if it made significant structural changes
to station platforms, tunnels and rail bridges. Once this realisation dawned, the Railways repudiated
the contract and offered to reimburse V the £30 he had by then paid. V did not accept the repudiation
and sued the Railways for £830 in damages. V argued that there was an implied term in the contract to
the effect that the Railways would have transported the boiler to him if he simply paid ‘ordinary rail
charges’. On account of this implied term, he argued, the Railways were duty bound to deliver the
boiler despite the enormous cost that would be visited on it. Applying the test of the curious bystander,
the court said: no. If the curious bystander had asked whether the Railways would transport the boiler
at all cost by simple payment of ordinary rail charges, the Railways, held the court, would have
answered no. Consequently, said the court, such an implied term could not be read into the contract.

(iii) Terms implied by trade usage

Terms implied by trade usage refer to those unexpressed terms which over time have come to be
endorsed by a particular community or industry. When we discussed sources of law in chapter one, we
saw how custom is recognised as a source of law. The thinking is much the same with terms implied

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by trade usage. Many industries have their own set of unwritten rules governing that industry and
when one is contracting with a particular industry one is expected to be familiar with those unwritten
rules. For example in the estate agents’ profession, there is an unwritten, but well established, rule that
estate agent’s commission is paid by the seller of immovable property. To override this rule the deed
of sale would have to provide for the contrary to apply. For terms to be implied by trade usage, those
terms must be ‘notorious, certain, and reasonable and not contrary to positive law.’

K. COMMON CONTRACTUAL PROVISIONS

Depending on the nature of the contract one is working with, one can expect to find myriad provisions
tucked away in contracts. Let us look at the most common ones.

(a) Condition

A condition makes the operation or the continued operation of the whole or a part of a contract
dependent on the happening of an uncertain future event, which is either definite or indefinite to
occur. At first blush, a condition looks like a term. However, this is not truly the case. Terms create
enforceable rights and obligations. This is not necessarily the case with conditions. A condition could
postpone the enforceability of a contract until the happening or non-happening of a future event.
Admittedly, the distinction between a term and condition is subtle. But it’s there.
There are two kinds of conditions: suspensive conditions and resolutive conditions. Suspensive
conditions postpone the operation of a contract until the happening of a future event. For example: I
sell you my house on condition that you obtain a loan to the value of R1 million within 30 days. The sale is
dependent on the purchaser obtaining a loan for a particular value within a particular time period. No
contract comes into existence until the condition is fulfilled. If the condition is not fulfilled the contract
simply falls away. Quite conceivably a party may frustrate the fulfilment of a condition in order to
prevent a contract from coming into existence. When that occurs, the doctrine of fictional fulfilment
comes into play. Where a party deliberately frustrates a condition to prevent the contract coming into
being the condition is deemed to be fulfilled and consequently, the contract comes into operation.
The innocent party may sue the guilty party to comply with the contract; alternatively the innocent
party may sue for damages occasioned by the breach. Thus in the above example, were the purchaser
not to take reasonable steps to secure a loan for the amount stipulated within the prescribed time, the
condition will be deemed to be fulfilled and the seller may sue the purchaser for the contract price.
Fictional fulfilment is always available as a remedy, unless the contract specifies otherwise.
A resolutive condition is a condition which terminates a contract on the happening of a
future event. For example: You may prospect for diamonds on my farm for as long as I am the owner of the
farm. The contract comes into immediate existence. However, the contract terminates the moment
ownership of the farm changes.

(b) Time clause

A time clause is a stipulation for the performance of some act on a date which is certain to occur. For
example: The parties agree that A will pay B the sum of R50 000 by 2 December 2010. Payment in terms
of the contract is deferred to a moment in time which is certain to occur. Thus obligations in terms of
the contract are placed on hold until the date arrives.
It is easy to confuse a time clause with a condition. However, there is a distinction. With a time
clause the date will definitely arrive. With a condition the event is uncertain to arrive. Compare these
two examples: You must pay me R70 000 the next time Halley’s Comet is seen in our skies vs You must pay

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me R70 000 the next time the Springboks win the Rugby World Cup. Since time immemorial Halley’s
Comet is known to make an appearance in our skies at intervals of 76 years. The time period is definite;
Halley will come. This is a time clause. However, whether the Springboks will ever win the World Cup
and when exactly that will happen is completely uncertain. Hence, we are dealing with a condition.

(c) Warranty

Sometimes one will come across a contract in which there is a section headed ‘warranties’. A warranty
is a term which expressly confirms the truth of a particular fact. Take the example of X who purchases
a painting. The sale agreement contains the following stipulation: It is specifically recorded that the
painting was painted by the famous artist Leonardo da Vinci. This is a warranty. If subsequently
established to be incorrect, it will give the innocent party the right to claim damages for breach of
contract. A warranty may also be given orally at the time when a contract is entered into. For example
there is a warranty where a party says at the time of conclusion of an oral contract: Are you sure that
this car was owned by Oprah Winfrey? Otherwise I do not want it, and the other party answers: Yes, indeed.
If it later turns out that the car was owned by Joe Shmoe, this is a breach of warranty which will permit
the innocent party to cancel the contract and to claim damages.
Immediately one notes that there is an overlap between the law relating to warranties and the
law relating to misrepresentation. Each of the above situations can also be construed as a
misrepresentation. But there is a major distinction. A misrepresentation is a representation made at
the time when the parties are still negotiating a contract, whereas a warranty is a statement made in
the contract itself such that the statement forms part of the express terms of the contract.
The CPA, however, creates an implied warranty of quality. In terms of section 56, even if the
parties had not expressly entrenched a warranty in their contract, goods sold are subject to an implied
warranty that they are fit for purpose and free of defects. A disgruntled consumer can within six months
return the goods without attracting any penalty if the consumer reasonably believes that the goods are
not fit for purpose and not free of defects, in which case the supplier must either repair or replace the
defective goods or refund the consumer.

(d) Cancellation Clause

A cancellation clause tells the parties the circumstances under which a contract may be cancelled. If a
contract does not contain a cancellation clause, parties will only be permitted to cancel the contract if
there is a material breach. What is considered material is determined by substantive law (common law
and statute). In the absence of a cancellation clause, the law does not permit parties to cancel a contract
for minor infractions. For example: X rents office space to Y. If Y fails to pay rental, substantive law
views this as a material breach, entitling cancellation even if there is no cancellation clause. But if Y
puts up some dry-wall partitioning on the leased premises which X did not approve, this will not give
rise to a ground of cancellation because our law of landlord and tenant does not view this as a material
breach. However, if there is a cancellation clause which specifically provides that the landlord can
cancel the lease if the tenant makes any structural alterations to the premises, then the cancellation
clause can be enforced the moment when there is an infraction on this account.

(e) Penalty Clause

When a party breaches a contract, the innocent party is entitled to claim damages. To claim damages,
the innocent party must prove firstly that she has suffered loss and secondly that her damages are
quantifiable. This can be a time consuming and expensive exercise, especially if it involves evidence

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from experts etc. To prevent having to prove damages, the parties can, in terms of the Conventional
Penalties Act 15 of 1962, agree in their contract that, should either of the parties breach the contract,
the guilty party will be liable for a pre-estimate of damages.82 Such clauses are commonly found in
building and engineering contracts where the parties agree that for each day the builder is late with
completion of a project he or she will be liable for an agreed sum of say, R500.
It must be noted that the Conventional Penalties Act contains a provision which allows a court
to reduce a penalty stipulation if the court finds that the penalty stipulation is well in excess of the
actual damages suffered by the innocent party.83

(f) Exemption clause/exclusion clause

Such clauses are inserted to exclude liability in the event of loss sustained by a party in circumstances
where, if the exclusion clause had not existed, the other party would have been liable either
in the law of contract or in the law of delict. You will recall our discussion of Durban’s Case
Water Wonderland (Pty) Ltd v Botha (see above). In that case Durban’s Water illustration
Wonderland relied on an exclusion clause contained on notices to evade liability. On the
facts, it will be remembered, the court permitted reliance on the notices.
Because exclusion clauses can be quite harsh on the consumer, the courts, when interpreting
such clauses, interpret them restrictively rather than widely. This is especially the case under the CPA.
When an exclusion clause is ambiguous, the courts are now obliged to interpret the clause in favour of
the consumer – the courts are keenly aware of the consumer’s unequal bargaining power, especially
when contracting for essential services or when contracting with large conglomerates. Exclusion
clauses are infamous in the insurance industry. In Barnard v Protea Assurance Co Ltd t/a Case
Pretoria Assurance 1998 (3) SA 1063 (C), Barnard (‘B’), a 29 year old man, died when illustration
he accidentally drowned while taking advanced scuba diving lessons. When his wife, as
nominated beneficiary, tried to claim the proceeds of his life insurance policy, the insurer rejected her
claim on the basis that the life insurance policy contained the following term:

‘[no liability will accrue to the insurer if death is caused by] active participation in horse-racing, motor car or
motor cycle racing or pace making, any speed contest or trial, winter sports, polo, mountaineering (necessitating
the use of ropes or guides) or pot-holing or skin diving or any other sport or pastime involving exceptional risk
of accident.’84

The insurer held that B’s activities fell into the category of ‘skin diving’, because it was
common cause that at the time of his death he was diving without the use of underwater breathing
apparatus. The court did not agree. The court held that skin diving was a special term of art. It referred
to diving with the assistance of certain minimum equipment, but including the use of a snorkel;
whereas B was actually engaged in free diving which required him to dive without a snorkel and to
descend to a depth of 8m to the ocean floor to collect sand and swim back to the surface. Even though
free diving was equally, if not more dangerous than skin diving, the court held, on an interpretation of
the exclusion clause, the insurer was liable to pay the deceased’s wife.85

(g) Non-variation clause

A non-variation clause prevents parties from varying the terms of a written contract unless that
variation is encapsulated in a written addendum to the contract, signed by both parties. This is a

82
Section 1.
83
Section 3.
84
At 1065J-1066A.
85
At 1070.

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standard clause found in most contracts. In the absence of a non-variation clause, parties are free to
vary the terms of a contract as they deem fit. Consequently, they may even vary a contract orally. An
oral variation is quite a bother especially when it comes to proving the terms of a contract should a
dispute arise. The process of proving the terms of a contract can turn into a he-says-she-says saga. To
prevent this from happening, parties simply put a non-variation clause in the contract, thereby
preventing any unauthorised variation.

L. THE PAROL EVIDENCE RULE

The best form of contract is the one reduced to writing; it is in black and white for the entire world to
behold. An oral contract, whilst equally enforceable, does create evidential problems. The exact terms
of an oral contract are dependent on the memories of people. Unlike elephants, people, by and large,
have poor memories. Events and decisions are often lost in the mists of time, resulting in a veritable
quagmire of ambiguities. Furthermore, whilst one likes to think fondly of one’s fellow humans, the
reality is that people lie. People lie all the time. And, when presented with the consequences of
litigation, do not be startled to discover that a once docile contracting buddy is actually a wolf dressed
in sheep’s clothing.
In the past the rule use to be that if a contract was reduced to writing the court would interpret
and apply the contract without recourse to extrinsic evidence. According to the parol evidence rule,
the court stayed within the four corners of the document. The court only permitted recourse to
extrinsic evidence if the court found the contract vague, ambiguous or incomplete. Of course, when
relying on the defence of mistake or misrepresentation, a party could also rely on what happened
during pre-contractual negotiations to prove that the contract as it stood did not accurately reflect
what was actually agreed upon by the parties.
Where a contract did not reflect the common intention of the parties or where it contained
typographical or clerical errors, any of the parties could apply to court to have the contract rectified so
that it read correctly. In such cases the courts were willing to refer to evidence extrinsic to the contract
to determine what the wording of the contract should have been.
It is highly debatable, after the coming into operation of the CPA, whether the parol evidence
rule will still stand in its pristine form. In terms of clause 44(3)(y) of the Regulations to the CPA a
term in a contract which has the effect of ‘restricting the evidence available to the consumer’ is
considered to be unfair. If a clause in a contract restricting evidence can be considered unfair, then
surely the general common-law rule which limits the consumer from referring to extrinsic evidence
where a contract is reduced to writing should also be considered unfair.

M. BREACH OF CONTRACT

When a person breaches a contract, the innocent party is entitled to claim specific performance or is
entitled to cancel the contract and claim damages. Specific performance means that the guilty party
will be compelled to perform in terms of the contract. These remedies will be discussed in more detail
later on. For the moment let us look at the different types of breach:
• delay in giving performance by the debtor (mora debitoris);
• delay in giving performance by the creditor (mora creditoris);
• repudiation i.e. rejection of the contract;
• positive malperformance i.e. defective performance;
• prevention of performance i.e. impossibility of performance caused by a party to a contract.

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(a) Mora debitoris

Mora means delay without a good excuse. Mora debitoris occurs when a debtor is free to perform but
fails to perform by a stipulated date. In a lease agreement, for example, a tenant will be in mora when
she fails to pay her rental by the agreed date.
If a contract does not stipulate a date for performance, the debtor must be given notice to
perform. The date for performance stipulated in the notice must be within a reasonable time. What is
considered a reasonable time depends on the nature of the contract and the circumstances of a case.
It is not uncommon for parties to stipulate in a deed of sale in respect of immovable property that the
seller must transfer the property to the purchaser within a reasonable time period after the seller has
received confirmation that the purchaser has secured a mortgage bond for the value of the purchase
price. The exact date of transfer is thus kept open. If the purchaser provides all the necessary financial
assurances and it later becomes apparent that the seller is dragging his feet to effect the transfer, the
purchaser can give the seller notice to transfer the property by a stipulated (reasonable) date. If this
date comes and goes and the seller has not transferred the property, then the seller would be in mora.
It goes without saying that in order for a debtor to be in mora, there must be an obligation that
is actually owing.

(b) Mora creditoris

This refers to delay or refusal on the part of the creditor to give the debtor such assistance as is required
to enable the latter to perform in terms of the contract. Furthermore, if performance is due the creditor
is obliged to accept performance. If the date for acceptance has not been decided by the parties, then
the debtor must give the creditor notice of a reasonable time within which to accept performance.
Naturally, the debtor, when tendering performance, must tender what is due in terms of the contract.
If the debtor tenders performance that is different to or less than that agreed to by the parties, the
creditor is not obliged to accept performance.
If the creditor frustrates performance, he cannot later be heard to say that the debtor is in
breach. If X agrees to renovate Y’s house on payment of progress draws, X will be expected to take the
house one step closer to completion only when he receives a progress payment from Y. If Y fails to pay
the progress payment, he cannot raise X’s non-performance as a ground of breach because Y is himself
in breach of the contract.

(c) Positive malperformance

If a debtor performs, but performs defectively, then he has committed the breach of positive
malperformance. X owns a face brick house. X asks Y to build a garage onto his house. The latter does
so, but uses the incorrect shade of brick. This is positive malperformance.
Alternatively, positive malperformance could also refer to incomplete performance: X
contacts with Y to deliver two computers, but Y delivers only one.
Lastly, it could also refer to a situation where the contract prohibits the debtor from doing
something and the latter does not abide by the prohibition. X and Y agree that if X ever decides to sell
the shares he owns in Pick ‘n Pay, he will offer the shares to Y first. If X sells the shares to Z, there is
positive malperformance.

(d) Repudiation

This occurs when a party to a contract expresses, by word or conduct, that he will not perform in terms
of the contract. X and Y enter into a deed of sale in terms of which Y agrees to sell his house to X. Later
Y writes to X and informs the latter that he has decided not to sell his house anymore, and thus will

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not be transferring the house to X. This is repudiation by Y. But repudiation could easily occur by X
too. Let’s say that Y is quite willing to perform in terms of the above contract. If X wrote to Y, informing
the latter that he found a better deal elsewhere, and therefore no longer intends to continue with the
transaction, X would also be repudiating.
For repudiation to constitute a breach, the repudiation must be without just cause. Thus
where a party repudiates a contract on account of misrepresentation, mistake, undue influence, or
duress, and can prove that any of these factors exist, his repudiation will not constitute a breach.
For repudiation to occur, performance need not be due. It can even occur in advance of the
performance date. This is called anticipatory breach. Anticipatory breach occurs when a party commits
an act which reasonably suggests to the other party that the first-mentioned party will not be
performing in terms of the contract. X agrees to perform a concert at the Baxter Theatre on 23
December 2011. A few days later X signs up to do a concert at Artscape on 23 December 2011. To the
Baxter, X has committed an anticipatory breach because by signing up with Artscape, X has indicated
that he may not be performing at the Baxter on 23 December 2011. X has repudiated his contract with
the Baxter way before the actual date for performance.

(e) Prevention of performance

This form of breach arises from an inability to perform because one of the parties has made
performance impossible as a result of actions flowing directly from himself, and not as a result of factors
which are beyond his control.
It will be recalled that earlier in this chapter we discussed supervening impossibility. There we
discussed factors which rendered a contract void on account of intervening circumstances which were
objectively beyond the control of either or both of the parties. If the house which I have rented to Y
has burnt down, Y cannot sue me for breach because the destruction of the house and the ensuing
inability on my part to perform was beyond my control. However, if the cause of my inability to
perform was as a result of my own doing, then I would be frustrating performance in which case I
would be committing a breach by prevention of performance.

(f) Conclusion

It is easy to see that the different types of breach are quite fluid. Consequently, there can be an overlap
between different categories of breach. Take for example, prevention of performance. When a person
prevents performance, his breach may be characterised as a breach by prevention of performance;
however, this breach may even be characterised as breach mora debitoris or breach mora creditoris
depending on the circumstances and who exactly is preventing the performance. On account of the
possibility for overlap it is not so important to pigeon-hole instances of breach. Rather, it is more
important for a person to identify that a breach has been committed. But the categories of breach may
assist in this regard.

N. REMEDIES FOR BREACH

When a party commits a breach, the innocent party has an election. He may either uphold the contract
– this is called specific performance – or he may cancel the contract and claim damages.

(a) Specific performance

Sometimes a contract is so lucrative that a party wants to compel the other party to follow through on
his obligations. X purchases a house with fantastic views and wonderful amenities. It is X’s ‘dream
house’. Were the seller, Y, to breach the contract, X may want to compel Y to transfer the house to him

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because he knows that even with all the money in the world he is unlikely to come across a house that
is so appealing.
To get specific performance, X would go to court and ask the court to compel Y to transfer the
house. The court, if it agrees, will grant a mandatory interdict.
While the courts will generally grant specific performance, there are instances when the courts
will not do so. If an obligation is personal, or if performance is inappropriate, contrary to public policy,
or unduly harsh, the courts will not grant specific performance. For example: if two parties are engaged
to be married and one of them has a change of heart, the courts will not compel the reluctant party to
enter into the promised marriage. The courts realise that such orders will only lead to further acrimony
between the parties.
For a party to claim specific performance he must himself be willing to perform in terms of the
contract. Thus in a contract for the sale of a house, the purchaser cannot claim specific performance if
he has not kept up his end of the bargain.
Whenever there are reciprocal obligations, and one of the parties (the plaintiff) claims specific
performance, the other party (the defendant) may raise a Roman law defence known as the exceptio
non adempleti contractus. This defence may only be raised in the case where the defendant (against
whom specific performance is sought) raises an objection and argues that the reason it has not
performed was because of the plaintiff’s own malperformance. Assume X contracts with a builder, Y,
to build on a garage to his face brick house. Y builds the garage but uses a different shade of brick, thus
resulting in X’s house looking like an edifice from Alice in Wonderland. Let’s assume further that the
house looks so funny that the house depreciates in value as a result of Y’s defective performance. It is
easy to predict what will happen. X is going to refuse to pay Y. When this happens Y is going to sue X
for the cost of the building work in terms of the contract. The payment of money constitutes a claim
for specific performance. When Y does so, X is going to raise the exceptio non adempleti contractus,
because X has a legitimate gripe against Y: Y has performed defectively. When confronted with this
defence, the court is going to reduce Y’s claim by the loss suffered by X. If it turns out that X’s loss
exceeds the contract price, Y will receive nothing and Y may even land up compensating X.
The Consumer Protection Act, however, complicates this area of law. Section 54 states that a
consumer has a right to assume, when goods are delivered in conjunction with the provision of
services, that those goods are ‘free of defects and [are] of a quality that persons are generally entitled
to expect’. Sections 55 and 56 when read together indicate that in every contract there is an implied
warranty that the goods will be ‘safe, good quality goods’. If a defect in the goods arises within the first
six months after delivery, the consumer has the choice to have the goods replaced or repaired or their
value refunded.

(b) Cancellation

A contract can only be cancelled if there has been a material breach. One cannot cancel a contract for
trivial reasons unless the contract specifically states such seemingly trivial reasons as grounds for
cancellation (cancellation clause). When a contract is cancelled one cannot claim specific
performance. One is then entitled to damages only.
For a breach to be material there firstly has to be a breach that falls into one of the categories
discussed above. And furthermore, the character of the act giving rise to the alleged breach must be of
such a nature that is regarded as so important that no reasonable contractant could be expected to
abide by the contract where such a breach has been committed. If a contract expressly states what types
of conduct will constitute breach, then as soon as one of those types of conduct materialise, a material
breach would have been committed. However, where the conduct complained of is not mentioned in
the contract, one will have to look at the nature of the contract in relation to the conduct to see whether
the conduct constitutes a material breach. For example, even if a lease agreement does not stipulate

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that non-payment of rental constitutes material breach, the very flavour, nature and objects of a lease
agreement tell us that non-payment of rental constitutes material breach, for why else would the
transaction of lease exist? Similarly, if an employer fails to pay his employee wages, or commission, or
benefits due in terms of an employment contract, any one of these transgressions would constitute a
material breach, because remuneration underlies the very nature of a contract of employment. If a
university failed to provide education to its students, this would constitute a material breach. However,
were an airline not to serve a decent meal on a flight – even where there was an expectation that it
would – this would not automatically constitute a material breach, entitling cancellation of the
contract of travel and a claim for damages. A decent meal is ancillary to the contract of travel. The
heart of the contract of travel is ensuring that the traveller is taken to his destination. However, if
certain promises were made by the airline and a fee was charged to meet those promises, a failure to
meet them would, to a reasonable extent, constitute a breach.
When deciding to cancel a contract, it is important to give notice of cancellation. However, if
the contract says that you do not have to then this requirement can be dispensed with.
Again, while the above principles seem easy to apply, the CPA confuses matters. In its
provisions dealing with fixed term contracts for example, it provides that if a consumer is in breach of
a fixed term agreement, the supplier must give the consumer 20 days’ notice of default, as well as the
chance to remedy. This has the effect of modifying the supplier’s right to cancel.86 The Act also restricts
the right of suppliers to use cancellation clauses. In time there will be greater clarity when the courts
have had the opportunity to iron out these aspects of the CPA.

(c) Damages

When a contract is cancelled, one is entitled to claim compensation. This compensation is given a
technical term: damages. In the law of contract one is entitled to claim compensation/damages to put
one in the position one would have been in had the contract been fulfilled and thus not breached (positive
interest). At first blush this rule sounds very easy, but it has many subtle contortions, making the law of
damages quite an intricate affair.
Claiming damages to place one in the position one would have been in had the contract been fulfilled
entitles the innocent party to claim ‘gains not made’ and ‘loss actually suffered’. Take the following
example: X, an art gallery, sells a painting to Y. X guarantees Y that the painting is a Leonardo da Vinci
original. Y pays R2 000 000 for the painting. Along comes Z who offers Y R4 000 000 for the painting.
A sale agreement is signed between Y and Z. Just before Y delivers the painting to Z, Y discovers that
the painting is a knock-off. Y can sue X for loss actually suffered (R2 000 000) – because this is what
he paid for the painting. In addition, Y can also sue X for loss of gain (R2 000 000) – this is the profit
he stood to make from Z, but which he had to forgo when he discovered the true status of the painting.
To claim damages for ‘gains not made’ and ‘loss actually suffered’ the loss in question must be
one which was reasonably foreseeable or one which was actually within the contemplation of the parties.
Accordingly, the aggrieved party can claim: (a) those damages that flow naturally and generally from
the kind of breach of contract in question and which the law presumes both parties contemplated as a
probable result of the breach, and (b) those damages that, although regarded in law as being too
remote to be recoverable, in the special circumstances pertaining to the conclusion of the contract,
both parties actually or presumptively contemplated would probably result from its breach.
The time for determining whether the loss was reasonably foreseeable is at the time when a
contract is entered into and not at the time when the contract is breached. The purpose of the
foreseeability criterion is to prevent the situation where parties are held liable for losses they had not
actually contemplated as a consequence of breach. The ambit of the foreseeability criterion is borne

86
Section 14.

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out by the facts in Victoria Laundry (Windsor) Ltd v Newman Industries [1949] 1 All ER 997. In this
Case
case, Victoria Laundry ordered a boiler from Newman for use in its laundry and dyeing business.
illustration
Delivery of the boiler was delayed and Victoria cancelled the contract and sued for damages. It
sued for damages for loss of profit flowing from a lucrative government contract it had entered into
but was unable to meet as a result of the boiler not being delivered on time. From the facts of the case,
it was clear that Newman was unaware, at the time of entering into the contract, of Victoria’s contract
with the government. The court awarded damages for loss of profits flowing from the ordinary
business activities of Victoria, but refused to award damages for losses sustained as a result of Victoria’s
inability to fulfil the government contract. The court held that Newman was not aware of, and could
not reasonably be expected to have been aware of, this loss.
Aside from the foreseeability criterion, there is a further limitation to a damages claim: When
a contract is breached, the innocent party has a duty to mitigate its losses. The law does not allow one
to sit back; to do nothing and then to cry about one’s losses later on. When a contract is breached one
must be proactive. One must do damage control. One must take reasonable steps to mitigate ones
losses. A landlord whose tenant has absconded from the premises before a lease has expired cannot sit
back. He must find an alternative tenant as quickly as possible. If he fails to do so, the tenant can argue
that he has not taken steps to mitigate his losses and hence, is not entitled to claim the full measure of
damages he is claiming. A theatre operator must find a new performer to take to the stage should it
become apparent that the hired performer will not be fulfilling his end of the bargain. Only if it is
impossible to find a new performer – who could have filled the space and brought in some revenue –
will the operator be permitted to sue the defaulting performer for the full measure of contractual
damages. Any proceeds received as a result of mitigation will be set off from the loss occasioned by the
guilty party.
In this chapter, it will be recalled, when we discussed contents of contracts, we came across
penalty stipulations. Parties are free in terms of the Conventional Penalties Act (see above), to
expressly agree to a pre-estimate of damages should any of the parties breach the contract. If such a
penalty stipulation exists, there is generally no need to calculate damages in terms of the
aforementioned principles. The calculation of damages becomes a mechanical process by simply
looking at the terms of the contract and the amount agreed upon by the parties as the damages amount.
The Conventional Penalties Act provides that one cannot claim a penalty in addition to damages,
unless the contract specifies otherwise. But it is important to note that, in terms of the Act, the court
has a residual power to reduce any penalty stipulation if the court thinks that it is unduly harsh.
One last thing about damages: one cannot claim sentimental damages in the law of contract.
One can only claim patrimonial damages. If I book into a hotel and my hotel stay turns into a disaster,
I can sue the hotel for breach of contract. In all likelihood I will recover the cost of my stay. However,
I will never be able to claim damages for the inconvenience that I suffered. Such damages must be
claimed in the law of delict. It is thus to the law of delict that we now turn.

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CHAPTER THREE
THE LAW OF DELICT
A. INTRODUCTION

T he purpose of the law of delict is to afford a person who has suffered a wrong a civil claim for
compensation. It is possible, but not always the case, for a single wrong to activate both
criminal and civil sanctions. As such, one will find that in many instances there is an overlap
between criminal law and the law of delict. If X, an inebriated driver, crashes into Y’s car, X may be
charged with the crime of driving under the influence. If X is convicted, X may be sent to prison or X
may be required to pay a fine to the state. X’s incarceration or obligation to pay a fine will serve as a
vindication of the rights of society to sanction people who do not abide by the rule of law. But, such
penal sanctions will come as cold comfort to Y as Y would have suffered personal loss; his car will have
to be repaired and he may even have sustained injuries requiring costly medical attention. Y’s remedy
will thus lie in the law of delict to recover losses occasioned by X’s conduct. The delictual remedy is a
civil one and is independent of any criminal proceedings. Even the courts which will hear the
respective matters will be different courts: criminal proceedings are heard by the criminal division of
the courts, whereas delictual actions are heard by the civil division.
It is difficult to specify all the instances where delictual actions have been recognised by our
courts. There are just so many. And, from time to time, the courts recognise new delicts. Aside from
delinquent road users, delictual liability has, for example, been imposed on the state for unlawfully
arresting someone; on a bank which paid the proceeds of a cheque to a third party who was not entitled
thereto; on an auditor who made a misstatement in a company prospectus, thereby causing investors
to lose a large sum of money; on a municipality which failed to keep its roads in a good state of repair,
where a person accidentally stepped into a pothole and hurt her ankle; on a newspaper for publishing
a defamatory article; on the paparazzi for taking a photograph of a film star whilst the latter was
enjoying a private moment at home; and on doctors, lawyers, accountants and other persons holding
themselves to be professionals, where they failed to exercise a reasonable standard of care and skill
when performing their functions, thereby causing others to suffer harm as a result of their dilatoriness.
The list is endless.

B. THE SHOPPING LIST OF REQUIREMENTS FOR DELICTUAL LIABLITY

Not every prima facie wrong gives rise to a delict. To succeed in a delictual action a plaintiff must, by
and large, prove all of the following requirements:
(a) That an act has been committed – this is called the actus reus requirement;
(b) That the act in question is wrongful – this is called the wrongfulness requirement;
(c) That the wrongful act in question was perpetrated either intentionally or negligently by the
defendant – this is called the fault requirement;
(d) That the fault-based wrongful act in question caused the harm complained of – this is called the
causation requirement;
(e) That the fault-based harm-causing wrongful act was not too remote – this is called the remoteness
requirement; and
(f) That the non-remote fault-based harm-causing wrongful act has resulted in quantifiable loss – this
is called the damages or harm requirement.

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The general rule is that if a defendant is unable to prove these requirements, a delictual action
will not lie. It is therefore important for us to consider and to understand all of the aforementioned
requirements. This chapter is thus dedicated to that purpose. However, before we do so, let us quickly
turn to the historical evolution of the law of delict; its constituent components; and the relationship
between the law of delict and the law of contract.

Summary diagram

Actus Reus

Damages Wrongfulness

DELICT

Remoteness Mens Rea

Causation

C. HISTORY AND CONSTITUENT COMPONENTS

The South African law of delict is approximately 2200 years old. It draws its origins from the laws of
ancient Rome and through time it has evolved into what we see today: a law that is really an amalgam
of Roman-Dutch law, English law and contemporary home-grown values, which include
constitutional values. Whilst the better part of the early 20th century was spent rejecting the influence
of English law on our law, academics and judges today agree that eschewing the influence of English
law on the development of the law of delict is like denying the existence of yeast in bread. Our courts
frequently turn, these days, to decisions of English courts for comparative study and guidance
whenever a novel or intricate question of law arises in the law of delict. Our courts do not always
borrow English principles into our law, for it is important to remember that our law is essentially
Roman-Dutch based, whereas the English law of delict developed on a casuistic basis, informed by the
judicious exercise of equitable discretion. The South African position is, therefore, that we will
incorporate English principles only where our law falls short and where the incorporation is necessary.
The influence of English law is pointed out here because we will refer, from time to time, to English
decisions that assist us to better understand our law.
South African law draws a distinction between fault-based delictual liability and strict liability.
For strict liability, fault in the form of either intention or negligence is not a requirement for the
existence of a delict. A delict can exist even where the defendant has not intentionally or negligently
committed a wrongful act. The common law and statute law recognise limited and special instances

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when such liability is countenanced. For our purposes, there is no need to discuss each and every one
of these instances.
The most important form of strict liability for an actuary is that which relates to the employer-
employee relationship. South African law, as do many other legal systems, holds an employer liable for
the delicts committed by its employee if, at the time when the delict was committed, the employee (a)
was acting within the course and scope of his employment and (b) acted either intentionally or
negligently. Thus, where a uniformed police officer offers a woman a ride in his patrol vehicle, and
subsequently rapes her, the victim will be able to sue the Minister of Safety and Security for damages.
Similarly, where an actuary provides incorrect information to a client, the latter can sue the actuary’s
employer for losses occasioned by such incorrect information. In both instances, the employer is
strictly liable; the employer has neither intentionally nor negligently committed the wrongful act in
question – it is the employee who has. For strict liability, it is therefore the case of the employee’s
intentional or negligent wrongdoing being ascribed to the employer who is sued as the defendant in a
matter. To state the employer’s liability in a different way, one can also say that the employer is
vicariously liable for the delicts committed by its employee.
In the case of fault-based liability, fault in the form of either intentional or negligent
wrongdoing is an essential component before delictual liability can be visited on a particular
defendant.
Delictual liability can be brought under three headings. There is liability under the actio legis
Aquiliae; liability under the actio iniuriarum; and the action for pain and suffering.
The actio legis Aquiliae is aimed at the recovery of damages for patrimonial loss. Here fault in
the form of either negligence or intention is necessary. The actio iniuriarum is aimed at recovering
damages for non-patrimonial loss flowing from infringements of the plaintiff’s personality interests.
Here only fault in the form of intention will suffice. Negligence will never do. Between the actio legis
Aquiliae and the actio iniuriarum lies liability for pain and suffering. This seeks to compensate a
defendant for personal injuries sustained. Fault either in the form of negligence or intention will do.
As the actio iniuriarum is concerned primarily with liability for defamation, infringements of
dignity and privacy, breach of promise to marry, loss of consortium and wrongful incarceration, the
actio iniuriarum will be discounted for the sake of this discussion. In this chapter we will only discuss
liability under the actio legis Aquiliae and liability for pain and suffering as they represent the instances
where an actuary is most likely to be affected by the law of delict.
It is possible for liability, in one action, to fall under both the actio legis Aquiliae and the action
for pain and suffering. Let’s say that X is driving down the N2 in her red Ferrari. She is involved in a
motor vehicle collision with Y who is deemed by the court to have driven her car negligently. In X’s
action against Y she is entitled to bring claims both for pain and suffering and for patrimonial loss
under the actio legis Aquiliae. The damages to her car, present medical expenses, future medical
expenses, and loss of income will all fall to be determined under the actio legis Aquiliae as this seeks to
compensate X for patrimonial loss i.e. actual financial loss endured by her estate; whereas damages for
pain and suffering (i.e. the ‘ouch’ factor!) and loss of amenities of life (should it turn out that X is
permanently injured) will fall to be determined under the rubric of liability for pain and suffering. But,
in the case where an actuarial firm negligently misstates information which it knows will be relied on
by an insurance company to make financial decisions, such a misstatement will give rise to a claim
under the actio legis Aquiliae only, as the loss suffered by the insurance company will be of a financial
nature affecting its patrimony.

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Constituent
elements

Strict liability e.g.

Actio legis
employer-employee Fault-based liability Actio iniuriarum Pain and suffering
Aquiliae
relationship

No deliberate or
negligent act on the Seeks to Seeks to
Seeks to compensate for compensate for
part of employer; Actual defendant compensate for
commits the delict personality interests physical and
the employee is at patrimonial losses
fault and this fault is deliberately or or sentimental loss psychological
i.e. financial loss to e.g. loss of one’s injuries sustained by
ascribed to the negligently one’s estate
employer as liberty or dignity a person
defendant

D. THE RELATIONSHIP BETWEEN THE LAW OF DELICT AND THE LAW OF

CONTRACT
In the introduction to this chapter, when the overlap between criminal law and the law of delict was
discussed, it was noted that these two fields of law are independent of each other – a person’s right to
activate criminal proceedings is unfettered by an action that may be brought in delict and vice versa.
Furthermore, the remedies offered by these two areas of law are fundamentally different from each
other. Criminal law punishes the accused by imposing a penal sanction, whereas the law of delict
obliges the wrongdoer to compensate the wrong sufferer with money. But, in the relationship between
the law of delict and the law of contract, things become a little more complicated.
The law of delict and the law of contract exist side-by-side in a complex symbiotic relationship,
for it is possible –
(a) for a contractual setting to give rise to a claim in contract and/or a claim in delict; and
(b) for a contractual matrix to provide a platform for a delictual claim.
To appreciate what is meant by statement (a), consider the following example: an
actuarial firm performs duties for a business in terms of a pre-existing contractual
arrangement. Should the business suffer loss as a result of the actuarial firm’s negligent
conduct, the business could sue the firm in the law of delict or in the law of contract, as negligent See Fig 1
conduct is prima facie wrongful for the purposes of the law of delict, and negligent performance below
of one’s obligations in terms of a contract could constitute a breach of contract on the ground
of positive malperformance. When confronted with a choice like this, it is preferable, where possible,
to sue in the law of contract rather than in the law of delict. Our courts are reluctant to permit people
to sue in delict in respect of claims which are essentially contractual in nature. As a matter of policy,
our courts try, as far as possible, to prevent a situation where the law of delict intrudes too much on
the domain of the law of contract.87 Furthermore, because liability under the law of delict is often more

87
See also 54 of the CPA which provides:
‘(1) When a supplier undertakes to perform any services for or on behalf of a consumer, the consumer has a right to—

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tenuous to establish (as one has to prove all the elements of delict before liability will lie) than in a
contractual claim, it is practically more advisable to sue under contract if a contractual relationship
exists, and if the conduct complained of constitutes a breach of the contract. But, where there is no
contractual nexus, or where the contract is for some reason voidable, the law of delict may be the only
remedy available to a party. To this extent, it will be recalled that in chapter two, when we discussed
misrepresentation, undue influence and duress as factors vitiating consensus in the law of contract, we
discovered that the presence of these factors renders a contract voidable. Where a contract is voidable,
we learnt that both parties have to make restitution and there is a concomitant right of the innocent
party to institute an action in the law of delict for damages occasioned by the misrepresentation, undue
influence or duress. The voidability of the contract gives rise to no contractual remedy as the effect of
declaring the voidable contract a nullity is to treat the contract as if it had never come
into existence. A voidable contract thus gives rise to a delictual action only as the wrong See Fig 2
complained of cannot be treated as a breach falling within the contractual realm. below
As regards the meaning of statement (b), take the following example: X firm
is an actuarial firm which offers services to an investment company in terms of a
contractual arrangement which exists between the two. The investment company has many clients
who invest their money acting on the former’s advice. Inevitably, the investment company will enter
into tightly-worded standard form contracts, containing carefully worded exclusion clauses,88 with
their clients in terms of which the former will insulate itself from all sorts of loss that may be suffered
by the clients. Should the clients subsequently suffer loss as a result of bad information supplied to
them by the investment company, the clients may elect to sue the source of that information, namely,
the actuarial firm – because they know that to sue the investment company will be futile in light of the
water-tight contracts which the investment company has entered into with them. Of course, the
difficulty with suing the actuarial firm is that there is no contractual nexus between the clients and the
actuarial firm. They, therefore, cannot sue the actuarial firm in the law of contract. Their right of
recourse will lie in the law of delict – provided, of course, that they can satisfy all the requirements of
a delict. In this case the contractual matrix (i.e. the contract between the actuarial firm and the
investment company plus the contract between the investment company and the clients) will provide
a platform for the clients to sue the actuarial firm in the law of delict.

(a) the timely performance and completion of those services, and timely notice of any unavoidable delay in the
performance of the services;
(b) the performance of the services in a manner and quality that persons are generally entitled to expect;
(c) the use, delivery or installation of goods that are free of defects and of a quality that persons are generally entitled
to expect, if any such goods are required for performance of the services; and
(d) the return of any property or control over any property of the consumer in at least as good a condition as it was
when the consumer made it available to the supplier for the purpose of performing such services,
having regard to the circumstances of the supply, and any specific criteria or conditions agreed between the supplier and
the consumer before or during the performance of the services.
(2) If a supplier fails to perform a service to the standards contemplated in subsection (1), the consumer may require the
supplier to either—
(a) remedy any defect in the quality of the services performed or goods supplied; or
(b) refund to the consumer a reasonable portion of the price paid for the services performed and goods supplied, having
regard to the extent of the failure.’
88
Exclusion clauses were discussed in chapter 2.

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Fig 1: Voidable contract giving rise to delictual damages

A enters into a
contract with B but
A the contract is B
voidable.
If B declares a contract void, then A and B must make
restitution and give back all performances made in terms of
Delict
the contract and B will have a claim in delict against A,
provided of course that B is guilty of the misrepresentation
and that B has contracted to his prejudice.

Fig 2. A contractual matrix can provide a platform for a delictual claim

Contract for services

Actuarial firm Insurance company
services

Since clients have no Standard term contracts with

contractual claim against exclusion clauses so clients
insurance company, they cannot sue insurance
could claim in delict company.
against actuarial firm.

Clients

With this brief, and yet important, introductory comment let us now turn to consider
the various elements of delictual liability under the actio legis Aquiliae and the action for pain
and suffering.

E. THE ACTUS REUS REQUIREMENT

As a matter of common sense, it will be appreciated that in order to establish a delict there has to be a
voluntary act on the part of the wrongdoer. The voluntary conduct in question can be a ‘commission’
or an ‘omission’. A commission is a positive act whereas an omission is a failure to act where there was a
duty to act. When an auditor provides incorrect information in a company prospectus, this is a
commission; but where a police officer fails to stop a brawl as a result of which people are injured, this
is an omission as there is a duty on the police to prevent harm from coming to people when they are
able to do so. Likewise, when a person fails to speak when there was a duty to disclose at the time of
contracting, thereby giving rise to a misrepresentation, the failure to speak can be characterised as an
omission giving rise to a delictual claim.
The actus reus (act) requirement, though an essential feature of delictual liability, is hardly
contentious in our law. The only time when it can become a contentious issue is when the defendant
wrongdoer claims that he was acting in a state of automatism. Automatism negates the voluntariness
of conduct. Thus where a person suffers a heart attack, epileptic fit or performs an act whilst
sleepwalking etc. there will be deemed to be no conduct on his part and any ensuing wrongful act will

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attract no liability. However, where a person commits a wrongful act whilst in a state of intoxication
or in a state of induced psychosis, the law may hold him liable on the basis of antecedent liability as he
should have foreseen the possible negative consequences of intoxication or induced psychosis.

F. THE WRONGFULNESS REQUIREMENT

This is the central requirement for a delict. When a court is confronted with an actus reus (i.e. an act
which is established to have been committed voluntarily), the court will generally assume that the act
in question is prima facie wrongful. However, to hold the conduct wrongful in law, the court will
consider whether it is reasonable to impose liability on that particular act in question. This is the heart
of the wrongfulness enquiry.
Wrongfulness is thus a net. It prevents the law of delict from becoming an unruly horse; it
prevents society from becoming overly litigious; and it prevents people from suing each other for the
most minor infractions.
To determine whether it is reasonable to impose liability, our courts are motivated by three
fundamental considerations:

(a) Do the legal convictions of society (public policy) regard the conduct in question as
unreasonable?
(b) Would the imposition of liability open the floodgates to litigation?
(c) Would the imposition of liability create a situation of indeterminate liability?

The courts, when asking themselves these questions, are not limited to apply these questions
independently. These questions are often considered by the courts as a collective assessment.
Let us consider each of these criteria in a little more detail.

(a) Do the legal convictions of society (public policy) regard the conduct in question as
unreasonable?

As was noted in chapters one and two, public policy is a viscous concept. Its viscosity is underscored
by the fact that it changes. In the past abortion was regarded as against public policy. Today abortion
is regarded as acceptable. There was a time when gay and lesbian marriages would have been
considered a heinous abomination. Today society seems to be more accepting of those types of
relationships. Even marrying a person of a different race was seen as a transgression of the natural order
in former times. Today, of course, we wonder what on earth our forefathers were thinking when they
prohibited people from marrying across colour lines.
Public policy considerations in the law of delict are no different from public policy
considerations in other areas of the law. The object is to determine whether public policy – whether
society – would favour the imposition of liability. In the assessment of public policy the courts are
often called on to weigh competing interests. They are required to weigh the interests of the
wrongdoer and the wrong sufferer against the values of greater society.
Minor infractions, as a general rule, will not count. If I pull your hair, this will not form the
basis for delictual liability. You may charge me with the crime of assault, but that is a different question.
Minor infractions present an easy answer. But what about those situations where the infraction is by
no means minor? Can one say that those infractions automatically ground delictual liability on the
basis that they are against the legal convictions of society? The answer is no, because as is often the
case, even major infractions raise ethical, moral and philosophical considerations which can cast a
question mark over their actionability. The courts in these instances have a really hard job in trying to
determine how the public feels about such infractions. Take the following example: A couple goes to

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a doctor and informs him or her that they have agreed not to have any more children. They have two
children and that is more than enough – thank you very much. As part of their family planning strategy,
they have agreed that one of them will undergo a sterilisation procedure to prevent the birth of more
children. After some counselling the male agrees that he will undergo the procedure. The doctor
performs the procedure. Many months later the female falls pregnant. Will this give rise to a delictual
claim against the doctor? This very question on similar (but not the same) facts came before our courts
in Mukheiber v Raath and Another 1999 (3) SA 1065 (SCA).
In deciding whether the actions of a doctor could be wrongful in these circumstances, the
court in Mukheiber considered some of the moral objections to this type of action. These are:
‘(i) that the birth of a normal and healthy child cannot be treated as a wrong against his parents, and
(ii) that the birth of such a child is such a blessed event that the benefits flowing from parenthood as a
matter of law cancel or outweigh the financial burden brought about by the obligation to maintain the
child. Thus it has been suggested in somewhat florid language that the birth of a healthy child is an
occasion for the popping of champagne corks rather than for the preferring of a claim for damages.'89

Against these seemingly unassailable moral considerations the court, nevertheless, noted that
where people decide to be sterilised so as to prevent births for socio-economic or ‘family reasons’, the
motive was a sound enough one so as not to be ignored. The presence of such motives, as a matter of
public policy, is sufficient, held the court, to hold the conduct of the doctor wrongful – thereby
entitling the parents to bring a claim for damages against the doctor for an amount sufficient to cater
for the child’s reasonable maintenance needs until the latter became self-supporting.
In recent times, the courts have applied constitutional principles to determine whether
conduct is against public policy, and hence wrongful. In Carmichele v Minister of Justice and
Constitutional Development 2001 (4) SA 938 (CC), a woman, C, was assaulted by a man who had been
granted bail after having committed an alleged previous rape. It was also the case that he had been
convicted on a charge of housebreaking once in the past. Whilst out on bail on the rape charge he
proceeded to stalk C. She complained to the police, but they did not remand him in custody. He then
viciously attacked her. She sued the Minister for damages in the law of delict for pain and suffering and
for emotional trauma. In a judicial hopscotch, the matter originally came before the Western Cape
High Court (then the Cape High Court). The court refused to recognise her claim on the basis that
the Minister could not, on the facts, be held liable for the omission of the police in question. As a matter
of policy, the court held, the omission was not wrongful. Accordingly, on the first leg of delictual
liability she failed to make out a case. She appealed this decision to the Supreme Court of Appeal,
which confirmed the decision of the Western Cape High Court.90 As a last resort she appealed to the
Constitutional Court. In the Constitutional Court she asked the court to recognise the omission in
question as wrongful. She argued that her rights to dignity and privacy had been infringed; that the
state owed her a duty as a citizen to fulfil its international human rights obligations to prevent abuse
to women; and that the police were constitutionally duty bound to serve and protect the citizens of
South Africa from crime in situations where the crime was clearly preventable and within the
contemplation of the law enforcement agency. The Constitutional Court agreed. It held that the
conduct of the police in this instance was indeed wrongful and ordered that the matter be sent back to
the Western Cape High Court for further adjudication.91 In its deliberations the Constitutional Court
had the following to say about the assessment of wrongfulness in contemporary society:

89
At 1079I.
90
At para 3.
91
At para 78.

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‘Before the advent of the [Interim Constitution], the refashioning of the common law in this area
entailed 'policy decisions and value judgments' which had to 'reflect the wishes, often unspoken, and
the perceptions, often but dimly discerned, of the people'. A balance had to be struck between the
interests of the parties and the conflicting interests of the community according to what 'the (c)ourt
conceives to be society's notions of what justice demands'. Under s 39(2) of the Constitution concepts
such as 'policy decisions and value judgments' reflecting 'the wishes . . . and the perceptions . . . of the
people' and 'society's notions of what justice demands' might well have to be replaced, or
supplemented and enriched by the appropriate norms of the objective value system embodied in the
Constitution.’92

The concept of wrongfulness is an evolving one. Its content cannot be pegged to particular
situations or frozen in a moment in time: the policy considerations underlying it transcend factual and
time constraints. Having said this, it must be noted that over time certain black-letter instances, where
wrongfulness has been held to be negated, have come to be recognised. In cases:
1) where a person is acting on the instructions of a superior order (e.g. a soldier, in acting on the
instructions of his commanding officer, causes harm to someone or their property); or
2) where a statute authorised a public official to perform certain acts in the public interest
(e.g. a statute authorising officials of a wild life agency to seize and destroy all illegally Instances
culled elephant tusks); or where our
3) where a person acts in defence of his or someone else’s person or property, and in courts have
the process causes harm to another; or said
4) where a person acts in a state of necessity (e.g. a person who drives his car recklessly conduct is
not
in an emergency situation and is involved in a motor vehicle collision); or
wrongful
5) where a plaintiff has consented to harm (e.g. a boxer who gets into a boxing ring and then
is knocked-out),
the ensuing harm to a plaintiff’s person or property will not be wrongful.
As regards the justification relating to the defence of person or property, a few things should be
mentioned. The attack necessitating the defence must have been in progress or imminent and not
merely threatened; the defensive act must have been necessary; the defensive act must have been
directed at the attacker; and excessive means should not have been used to ward off the attack. In the
case where property is being defended, the property should not be of trivial value to the owner.

(b) Would the imposition of liability open the floodgates to litigation?

In some places in the world when one buys a cold drink, one will find a warning on the bottle top
cautioning the thirsty not to open the bottle with their teeth. Who are these people who open bottles
with their teeth? Do they not know that it is harmful to do so? Of course, all reasonable people know
that opening a bottle with your teeth can cause harm. Or don’t they? Chances are that the reason why
these words of peril exist on bottle tops is because somewhere, sometime, there was a person who
actually did open a bottle with his or her teeth and in so doing lost a canine or a molar, or both, and
then successfully sued the manufacturer of the cold drink in the law of delict. After an action like this,
the floodgates to litigation open, entitling every mindless Tom, Dick and Harry to sue manufacturers
for the slightest infraction of what is perceived to be their duty to warn the public against all the perils
associated with their product. Suddenly, one will be told to mind the gap between the platform and a
train; one will be cautioned to stand clear of lift doors when these are closing; people will be advised
to tread cautiously when stepping onto and when alighting escalators; and car parks will have clearly
demarcated green areas for pedestrians to walk on. This is what happens when we open the floodgates
to litigation. Manufacturers and service providers of all sorts of products and services become

92
At para 56.

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vulnerable, and in a bid to insulate themselves they have to go to extraordinary lengths to warn people
against all sorts of perils, no matter how predictable these perils may be.
The South African law of delict is cautious about recognising a particular act as wrongful. If
the court believes that to recognise the act in question as wrongful will open the floodgates to litigation,
it will refuse to do so. South African law refrains from creating a situation where people are rewarded
for their stupidity.
In the case of professional liability, the courts are always concerned about how a particular
holding will affect the defendant’s profession in general. In the Mukheiber case (see above) one sees
evidence of this in the following statement:

‘A third problem in the type of case now under consideration is the fear of imposing too heavy a burden
on the doctor. In contract, the doctor can contract out of liability. While generally it is not impossible
or contra bonos mores to contract out of delictual liability, it is difficult to see how it could realistically
have been done in the present case.’ 93

The specificity of the facts of Mukheiber, where the doctor made an unsolicited negligent
misrepresentation in a consultation to the effect that his patient had been sterilised when in fact he
had not been, was sufficient to allay the fears of the court that it was creating a precedent whereby
every botched sterilisation would automatically become actionable. The courts shy away from creating
situations where professionals are expected to show such degrees of caution which would ultimately
hamper their ability to offer services.

(c) Would the imposition of liability create a situation of indeterminate liability?

Even where an act is wrongful on the grounds of public policy, and even where the court is satisfied
that the recognition of the wrongful act in question will not open the floodgates to litigation, the
courts, nevertheless, are reluctant to recognise an act as wrongful if they think that such recognition
will create the spectre of indeterminate liability i.e. liability that extends too far. Perhaps, this principle
is best illustrated by the English decision of Weller & Co Ltd v Foot and Mouth Disease Case
Research Institute [1966] 1 QB 569. In this case a research institute negligently caused the illustration
foot-and-mouth disease virus to escape from one of its research laboratories, thereby
wreaking havoc on the local farming industry. Not only did the farming industry suffer losses, but those
companies that were involved in the transport of meat products also endured huge losses on account
of their inability to transport meat owing to a quarantine on meat products imposed by the local
authorities. When the farmers and the companies sued the research institute for damages, the court
held that the conduct of the research institute, by negligently allowing the virus to escape, was
wrongful, but only in so far as the farmers were concerned. The court held that the work of the research
institute was of important social utility, such that it militated against extending its liability so widely as
to jeopardise its continued operation. This was an instance where the court, as a matter of policy and
social utility, refused to allow liability for the wrongful act in question to extend beyond that which
was absolutely necessary in the circumstances.
In Carmichele v Minister of Justice and Constitutional Development (see above), one of the
concerns raised on behalf of the Minister before the Constitutional Court was that if the court held
the failure by the police to remand the assailant in custody to be wrongful, the court would
inadvertently create a situation of indeterminate liability where the state could be held liable when a
magistrate grants, or a prosecutor fails to oppose, a bail application in a case where the bail application
should have been refused or opposed, and the accused subsequently commits a crime. The court did

93
At para 50.

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not agree. The court felt the functions of the police when compared to the duties and functions of
magistrates and prosecutors were different and that the question of wrongfulness will weigh differently
for magistrates and prosecutors. But here again, one sees the concern for creating indeterminate
liability.

G. THE MENS REA (FAULT) REQUIREMENT

Fault in the form of either intentional or negligent conduct by a wrongdoer is an essential element of
delictual liability, except in the case where the wrongdoer is vicariously liable e.g. where an employer
is sued for a delict committed by one of its employees. But even in the case of vicarious liability, it is
still necessary to prove that the person who actually performed the delict (for example, the employee)
did so either intentionally or negligently.

(a) Capacity

Before a wrongdoer can be fault-ridden, one has to establish whether the wrongdoer is accountable
for his or her actions. The question of accountability could be seen as a separate requirement for
delictual liability. However, accountability is treated by our courts and academics as an ancillary
consideration in the assessment of fault.
To be accountable, the wrongdoer must possess both cognitive and conative capacity, i.e. he
or she must be able to distinguish between right and wrong (cognitive capacity) and he or she must
be able to act in accordance with such an appreciation (conative capacity). If either the cognitive or
the conative capacity is absent, the wrongdoer is rendered unaccountable, and hence not liable.
Various factors may intrude on a person’s ability to be accountable for his or her actions, for
example, insanity, intoxication, drugs, provocation and age. In the law of delict, the question of insanity
and provocation does not always arise. And in the case of intoxication and drugs, the principle of
antecedent liability has a neutralising effect on accountability. According to the principle of antecedent
liability, a person who voluntarily and without justification puts himself in a position where he is more
susceptible to causing harm, cannot later rely on his lack of capacity to exculpate himself from liability.
Thus where a person goes to a nightclub, imbibes a few glasses of liquor, goes into the backroom and
snorts some cocaine, and later commits a delict, he is liable. He cannot be heard to say that his dulled
senses rendered him unaccountable for his actions. Reasonable people know that to engage in such
activities dulls one’s senses, creating the reasonable possibility for harmful consequences to ensue.
Age, as a factor negating accountability, is a more successful defence. This is especially the case
where children commit delicts. The position in our law is as follows:
(a) A child below the age of 7 is not accountable for his actions. There are no exceptions to this rule.
(b) A child between the age of 7 and 14 is not accountable for his actions, unless it can be shown that
he possessed the intellectual ability to distinguish between right and wrong and to act in
accordance with such an appreciation. The onus is on the person alleging that the child was
accountable at the time when the delict was committed to prove this.
(c) A child above the age of 14 is deemed to have the intellectual ability to distinguish between right
and wrong and to act in accordance with such an appreciation, unless the contrary can be proven.

Unlike the normal test for negligence, which is essentially an objective test, determining
whether a child is accountable is a subjective enquiry taking into account the relevant characteristics of
the particular child.

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(b) Negligence

If one were to do a quick survey of South African case law, one would discover that in the
overwhelming majority of delict claims, negligence would have been the basis of mens rea. This is
because it is rather hard to prove that a person acted intentionally, and negligence is a less rigorous,
but equally effective, fault requirement to establish liability for patrimonial loss.
In criminal law the difference between intention and negligence is material as it has a bearing
on the outcome of a case. A person who commits a crime intentionally earns a heavier sentence than
a person who commits a crime negligently. For delictual liability under the actio legis Aquiliae or
liability for pain and suffering, whether the defendant commits the wrongful act intentionally or
negligently does not matter; the outcome is the same; the plaintiff is entitled to the same measure of
delictual damages in either case.
A person is negligent if she fails to conform to the standard of the reasonable person in the
position of the defendant. The test is as follows:

A person is negligent if

(a) a reasonable person in the position of the defendant-

(i) Would have foreseen harm of a general kind that actually occurred;
(ii) Would have foreseen the general kind of causal sequence by which that harm occurred;
(iii) Would have taken steps to guard against it; and
(b) The defendant failed to take such steps.

As mentioned, South African case law is peppered with instances of delicts committed
negligently. To gain some appreciation of how the negligence test is applied, let us look at some
examples.
In Wasserman v Union Government 1934 AD 228 a widow brought a loss of support Case
claim against the government for causing the death of her husband. The facts were as illustration
follows: W was a police officer. A swarm of bees had hived in the roof of the police station at
which he was stationed. The chief constable asked W to stick his head out of a window to see where
they had hived. On doing so, a bee stung W and he died. His widow argued that it was the government’s
duty to make sure that the premises was safe and by failing to remove the bee hive it had acted
negligently. The court held that even though it was foreseeable that a person could have died from a
bee sting, the remoteness of that possibility actually eventuating meant that a reasonable person would
not have taken steps to prevent the harm from occurring. The court therefore dismissed the plaintiff’s
action. Evidently, requirement (iii) (see above) of the test for negligence had not been met.
In Knouwds v Administrateur, Kaap 1981 (1) SA 544 (C), a school girl ran across a Case
school playing field. She tripped over a lawnmower and was injured. The Cape illustration
administration was held liable because it was found that the school in question had acted
unreasonably. The school could proffer no reasonable explanation why it could not mow the lawn
when the children were in class or after hours. In the circumstances the harm was foreseeable and
could have been prevented by a reasonable person taking reasonable steps.
In Cape Metropolitan Council v Graham 2001 (1) SA 1197 (SCA), a motorist was Case
driving along the world famous stretch of Cape beauty known as Chapman’s Peak. His car illustration
was struck by a landslide of falling rocks. There were signs warning motorists of potential
rock falls. When he sued the Cape Metropolitan Council, the latter argued that it had done everything
reasonably possible to warn motorists of the danger and had therefore not acted negligently. The
Supreme Court of Appeal did not agree. It held that the Council was aware of the particularly high
rainfall that season. The Council was consequently duty bound, held the court, to take more proactive

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steps to prevent harm to motorists than by simply putting up warning signs. Posting signs was not
good enough to bring home to motorists the danger of running the gauntlet. The road should have
been closed, held the court.
After reading the above cases, perhaps, you think that the outcomes were rather predictable.
But let’s consider a case that presents more of a challenge: Sea Harvest Corporation (Pty) Case
Ltd and Another v Duncan Dock Cold Storage (Pty) Ltd and Another 2000 (1) SA 827 (SCA). illustration
The facts of the case were as follows: Duncan Dock was a company that owned a cold storage
facility in the Cape Town harbour. Sea Harvest entered into an agreement with Duncan Dock in terms
of which the latter would store Sea Harvest’s fish stocks pending overseas export. One New Year’s
night the cold storage facility in which the fish stocks were housed burnt down. The devastating fire
was confirmed to have been caused by an unidentified New Year’s reveller who had fired an emergency
flare from sea which landed on the cold storage’s roof resulting in the building going up in smoke.
Following the huge loss suffered by Sea Harvest, it sued Duncan Dock in delict. In court Sea Harvest
raised an ingenious argument. Although the contract between it and Duncan Dock insulated the latter
from liability, Sea Harvest argued that it was bringing a delictual action for the loss that it had sustained
on account of a wrongful negligent act perpetrated by Duncan Dock before the contract for storage
had even been concluded.
It was common cause that the destroyed cold storage facility did not have an emergency fire
sprinkler system. Sea Harvest argued that if a sprinkler system had been installed the fire would not
have had such devastating consequences. By failing to install a sprinkler system at the time of
construction of the cold storage, Duncan Dock had committed a wrongful negligent act.
Evidence before the Supreme Court of Appeal revealed that the building had been erected
according to code. With the exception of cold storage facilities in America, where building codes
required sprinkler systems to be installed, in 1992 when this cold storage facility was built, there was
generally no requirement in South Africa for sprinkler systems to be installed when constructing cold
storage facilities. Faced with this argument, Sea Harvest retaliated by arguing that even if it was the
case that sprinkler systems were not the norm in cold storage construction in South Africa at the time,
in this particular case there was a special duty on Duncan Dock to have one installed. The practice of
shooting flares in the air in Cape Town harbour on New Year’s night was an activity that had been in
existence for at least 20 years. Given the location of the cold storage, and having regard to the fact that
the building was susceptible to being hit by flares on New Year’s night, Duncan Dock should have
installed a sprinkler system. That it did not, pointed to negligence, argued Sea Harvest. The court
reasoned the matter and held as follows:

‘There can be no doubt that as a general possibility a fire in the cold store at Duncan Dock was
reasonably foreseeable. Indeed, fire extinguishers and hose-reels were installed at various places within
the building to guard against such an eventuality. It is also true that the causes of fire are varied and
many. Nonetheless, it is axiomatic that what is reasonably foreseeable must necessarily be confined to
those fires, whatever their cause, which fall within the parameters of reasonable possibility. Typically,
what would have been reasonably foreseeable in the present case would have been the possibility of a
fire starting somewhere in the building itself. Whether in such an event the fire-fighting equipment
actually installed would have been sufficient to control it or whether sprinklers would have been
required is, of course, a matter of speculation. But what actually occurred was something entirely
different. To simply equate it for the purpose of determining culpability with just any fire could have
the effect of attributing culpability for damage resulting from a danger which in truth was not
foreseeable as a reasonable possibility. Expressed in abstract terms, the fire was the consequence of
something in the nature of a projectile falling onto the roof from above and burning at a temperature
sufficient to ignite the fibreglass gutter. Only the gutter was combustible. The roof sheeting and the
outer shell of the building was not. According to the evidence it is the resin in the fibreglass that burns.

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It constitutes about 35% of the material and once it has set, requires what was described as a “high
calorific value” or “fairly substantial heat source” to ignite. Indeed, Basson in the course of an
experiment he conducted in his laboratory experienced some difficulty igniting a fibreglass gutter with
a bundle of burning newspaper. However, we are told that distress flares produce a sustained flame and
burn at a relatively high temperature; in other words, just the thing to ignite a fibreglass gutter. With
the benefit of hindsight the obvious and reasonable step to guard against the danger of such an ignition
source would have been to install wholly non-combustible gutters. But fibreglass gutters were
commonly used in the harbour area and elsewhere. According to Visser his investigation subsequent
to the fire revealed that something like 50% of the gutters in the harbour area were of fibreglass.
Having regard to the particular circumstances of the case, it seems to me therefore that the
question of culpability must be determined not simply by asking the question whether fire, i.e. any fire,
was foreseeable but whether a reasonable person in the position of Worthington-Smith or Visser would
have foreseen the danger of fire emanating from an external source on the roof of the building with
sufficient intensity to ignite the gutter. This is the question to which I now turn.
As previously mentioned, the building was relatively isolated in the sense that there were no
other buildings in the immediate vicinity from which a fire could readily spread to the cold store; nor
was there anything about its locality in the harbour which rendered it more vulnerable to fire. The
region was not prone to lightning of the kind that would set fire to buildings. Save for a burning flare,
which was the actual cause of the fire, it is therefore difficult to conceive of any other source of fire
which could have set the roof alight from above.
It was not in dispute that the firing of distress flares at midnight on New Year’s Eve was a
regular occurrence and that it had been so for many years. However, both Worthington-Smith and
Visser testified that they were unaware of the practice and I did not understand their evidence in this
regard to have been challenged. Counsel for the appellants suggested in argument that Worthington-
Smith ought to have made inquiries at the port captain’s office (which presumably would have been
aware of the practice) to ascertain if buildings erected in the harbour were subject to any particular fire
risk such as that arising from the firing of flares. With hindsight it is no doubt possible to think of all
sorts of steps that could have been taken or inquiries that may have been made. But what has to be
postulated is the foresight and conduct of a reasonable person at the relevant time, i.e. in 1992 prior to
the fire. The plans for the building, including precautions against fire, were required to be approved
ultimately by the port engineer. In these circumstances, to expect Worthington-Smith in addition to
have made inquiries of the port captain as to the possibility of some unforeseen source of fire, such as
distress flares, is in my view expecting too much. Had the cold store been situated in close proximity
to the tanker basin or oil storage tanks or some other reasonably foreseeable source of danger, the
position may have been otherwise; but it was not. I do not think his failure to make such an inquiry was
unreasonable.
It should not, of course, be overlooked that notwithstanding the long standing practice of
firing off flares in celebration of the New Year there had never been a fire caused in this way. According
to the evidence flares are designed and required by regulation to ignite at a height of not less than 600
feet and to burn out at a height of not less than 150 feet. In the course of some 20 years Mr Mory, who
had apparently spent every New Year’s Eve at the yacht club, and who testified on behalf of the
appellants, had seen flares land on the ground still burning no more than “a couple of times”. Mr
Woodend, who became port captain subsequent to the fire, testified that in the course of more than 30
years experience working in various harbours around the country he had never once seen a flare fall to
the ground still burning. Even if Worthington-Smith and Visser knew or ought to have known of the
practice of setting off flares at New Year, the possibility of a flare landing while still burning and setting
fire to the gutter of a building with an otherwise non-combustible shell strikes me as so remote as not
to have been reasonably foreseeable. With the benefit of hindsight the situation may seem otherwise;
it usually does. But that is not the test. In S v Bochris Investments (Pty) Ltd and another (supra) at 866J–
867B Nicholas AJA said the following:

“In considering this question [what was reasonably foreseeable], one must guard against what

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Williamson JA called ‘the insidious subconscious influence of ex post facto knowledge’ (in S
v Mini 1963 (3) SA 188 (A) at 196E–F). Negligence is not established by showing merely
that the occurrence happened (unless the case is one where res ipsa loquitur), or by showing
after it happened how it could have been prevented. The diligens paterfamilias does not have
‘prophetic foresight’. (S v Burger (supra) at 879D).) In Overseas Tankship (UK) Ltd v Morts
Dock & Engineering Co Ltd (The Wagon Mound) 1961 AC 388 (PC) ([1961] 1 All ER 404)
Viscount Simonds said at 424 (AC) and at 414G – H (in All ER):
‘After the event, even a fool is wise. But it is not the hindsight of a fool; it is the foresight of the
reasonable man which alone can determine responsibility.’ ”

I respectfully agree. Worthington-Smith testified that had he been aware of the practice of
firing flares he would have taken some precaution against the danger such as installing a different kind
of gutter. Visser’s attitude was much the same. (Neither thought that a sprinkler system was called for.)
But, yet again, it is easy to be wise after the event and having regard to what had happened it would
perhaps have been surprising had their attitude been different. By the time they testified the cold store
had been rebuilt with a non-combustible gutter. I do not think this concession on their part is of any
significance.
It follows that in my view the evidence establishes that the danger of fire emanating from an
external source on the roof of the building with sufficient intensity to ignite the gutter was not
reasonably foreseeable; or, expressed differently, a reasonable person in the position of Worthington-
Smith or Visser would not in my view have foreseen the danger as real enough to warrant precautionary
measures. The conclusion that Worthington-Smith and Visser were not negligent renders it
unnecessary to consider the further question of whether their negligence could give rise to vicarious
liability on the part of the respondents.’94

The above statement reveals how the court embraces the facts of a case and sets this against
the test for negligence to arrive at what it deems to be the common sense answer. Of course, every case
turns on its own facts. There is no such thing as one-size-fits-all when it comes to applying the test for
negligence.
Where one is dealing with a professional, the test of the reasonable person is altered ever so
slightly to that of the reasonable expert in the position of the defendant. In the case of an attorney,
accountant, director, doctor, and for that matter, an actuary, the courts pegs the conduct of the
defendant against what a reasonable attorney, accountant, director, doctor, actuary etc. would have
done if confronted by the same circumstances as those encountered by a defendant in a given case.
The test is always one of reasonableness. The courts would never expect an expert to display
Solomonic wisdom, prophetic foresight or chameleonic caution. To this extent, the courts have said
that the standard is not the highest level of competence; it is the degree of skill that is reasonable having
regard to ‘the general level of skill and diligence possessed and exercised at the time by members of
the branch of the profession to which the practitioner belongs.’95

(c) Intention

Fault in the form of intention, as mentioned earlier, is quite difficult to prove. Intentional fault comes
in three guises: (a) dolus directus; (b) dolus indirectus; and (c) dolus eventualis.
Dolus directus refers to that situation where the wrongdoer consciously intends to bring about
a particular consequence. His act is thus premeditated. Dolus indirectus refers to that situation where
the wrongdoer consciously intends to bring about a consequence, but foresees the very real possibility
that his action may have a second consequence, and the second consequence eventuates. Dolus

94
At para 23-28.
95
Van Wyk v Lewis 1924 AD 438 at 444.

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eventualis refers to that situation where a wrongdoer foresees a possibility of a particular consequence
materialising, and then discounts that possibility in circumstances where a reasonable person would
not have discounted the possibility. As one can appreciate, it is no easy task proving that a particular
act was intended. To prove intention, there must be evidence which clearly suggests that a defendant
subjectively intended a particular consequence, whether as a direct result or an indirect result, or as a
reasonable result of his actions. Having regard to this rather difficult evidential burden it is therefore
easy to see why negligence, based on an objective assessment, and which is sufficient to establish
liability in an Aquilian action and also in a claim for pain and suffering, is the more popular form of
fault.

H. THE CAUSATION REQUIREMENT

Causation is concerned with determining whether a particular consequence was actually caused by a
particular act. The courts generally settle this question by applying the ‘but for’ test. Courts ask: but
for the act of the wrongdoer, would this particular consequence have arisen? If the answer is no, then there
is a causal connection between the act and the harmful consequence. At first blush this test seems easy
to apply. But, every now and again, a factual situation arises which presents a causal conundrum.
X is involved in a car collision caused by Y’s negligent driving. X sustains minor injuries. On
the way to the hospital, the ambulance transporting X has a tyre burst as result of which the ambulance
capsizes. X sustains major injuries. Can X hold Y liable for the major injuries? Who caused the injuries?
Was it Y’s conduct? Or was it the tyre burst that was to blame? If one applies the but for test one would
say but for Y’s negligent driving X would not have been in the ambulance to begin with and hence, Y
should be liable to the full extent. However, it can also equally be argued that but for the tyre burst X
would not have sustained major injuries and thus Y should only be liable for the injuries caused by the
collision and not the ensuing injuries sustained by X after the ambulance capsized.
Let’s take the example even further: after the accident, X is taken to hospital and is treated
negligently by the attending doctor as a result of which X is permanently paralysed. Who caused the
paralysis? Was it Y or the doctor? It does not seem fair to blot out the doctor’s actions by applying the
‘but for’ test to Y’s actions only. In the case of multiple causes, such as this, the ‘but for’ test fails.
Fortunately, the answer to this dilemma lies in the next element of delictual liability namely, the
remoteness requirement.

I. THE REMOTENESS REQUIREMENT

It is often the case that a person causes harm but the harm leads to unexpected consequences (for
example, see the case study above involving X, Y and the doctor), or that harm is caused but to an
unexpected person. There is a tendency to think that a person who causes harm should be liable for all
the consequences of his actions, whether these are foreseeable or not. However, this is not the way
that the law of delict treats the matter. Even where one can show that a person’s actions caused, or
potentially caused, harm, no delictual liability will lie if the harm suffered was so remote so as not to have
been reasonably foreseen by the wrongdoer in his or her position. By formulating the remoteness
requirement in this way, the courts often associate the remoteness assessment as testing the presence
of legal causation where a plaintiff has already established factual causation. Remoteness (legal
causation) acts as a buffer to test whether the results yielded by factual causation would cause undue
prejudice to the wrongdoer.
The remoteness criterion is essentially a policy consideration that seeks to ensure that people
are not held liable for consequences that are too far-fetched or for consequences ultimately brought
about by multiple causes. The test for remoteness ‘is a flexible one in which factors such as reasonable

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foreseeability, directness, the absence or presence of a novus actus interveniens [i.e. a new intervening
act], legal policy, reasonability, fairness and justice all play a part.’96
The presence of an intervening act (breaking the chain of causation) is an important factor of
the remoteness enquiry, but it is not the only factor. One sees from the aforementioned test that it is
dexterous enough not to be overwhelmed by one consideration. In the example of X, Y and the doctor,
one would still ask – considering the questions of reasonable foreseeability, directness, legal policy,
reasonability, fairness and justice – whether it is appropriate for liability to be visited on Y for all of X’s
injuries, having regard to the intervening conduct of the medical practitioner, who himself owed X a
duty of care as one would expect of a reasonable medical practitioner. In that case, as a matter of policy,
the actions of the doctor would be held to have had the effect of introducing a new act into the
sequence of events leading to the harm ultimately suffered by X. But in the tyre burst example, the
harm suffered by X as a result of the ambulance capsizing is, perhaps, not so remote as to break the
factual causal connection between Y’s conduct and X’s injuries for one can reasonably anticipate that
an ambulance could experience a tyre burst and capsize, thereby causing further injury to passengers.
In International Shipping Co (Pty) Ltd v Bentley 1990 (1) SA 680 (A), an auditor had
wrongfully and negligently misstated the financial position of a group of companies, which Case
illustration
allegedly caused a financier to provide increased financial assistance to the group. When the
companies were liquidated, the financier sued the auditor on account of the latter’s negligence.
Having satisfied all the other elements of delictual liability (wrongfulness, negligent fault, and factual
causation) the case eventually turned on the question of remoteness. The question before the court
was whether the harm occasioned by the wrong was foreseeable and not remote. In this case, the court,
having regard to the factual matrix before it, held that the auditor was not liable as the loss suffered by
the financier was too remote – there was not a sufficiently close legal causal connection between the
auditor’s negligence and the loss.97 On the facts, it appeared that even though the auditor had provided
the false report, over a period of two years before the liquidation of the group there were ample other
indications at hand to raise reasonable suspicions about the companies’ liquidity. If the financier had
applied proper business acumen, it would have realised the financial predicament of the company
during that time and taken steps to immediately call in the loans made. The financier chose to ignore
all these tell-tale signs. The facts also revealed that the financier had not abided by its own credit limit
requirements when dealing with the companies. In so doing, it dug a far deeper hole for itself. It
furthermore transpired that the financier, during the existence of its business relationship with the
group, relied on profit and income forecasts made by one C, an executive of the group, when there
were ample signs before the financier to suggest that C was a shady character who was known to cook
the books to evade tax liability. To hold that the auditor’s report was thus the legal cause of the
financier’s loss was incorrect. The financier had by its own conduct, held the court, caused its loss.
In Smit v Abrahams 1994 (4) SA 1 (A), the plaintiff’s bakkie was written-off after Case
being involved in a motor vehicle collision with the defendant. The plaintiff, a hawker, was illustration
too impoverished to afford insurance for his vehicle and accordingly, was unable to purchase
a new vehicle immediately after the collision. To continue with his business he rented a vehicle for a
period of three months following the incident. He instituted action against the defendant for the
market value of the bakkie and also the cost of hiring alternative transport for three months. In this
case, the defendant argued that he was not liable for the loss occasioned by the plaintiff’s lack of funds.
While he may have been liable for the market value of the bakkie, the defendant argued that the cost
of hiring a new vehicle was not as a result of his conduct, but as a result of the plaintiff’s inability to
purchase a new vehicle. To this extent, the defendant relied upon the case of Owners of Dredger

96
OK Bazaars v Standard Bank of South Africa Ltd 2002 (3) SA 688 (SCA) at 765.
97
At 703-794.

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Liesbosch v Owners of Steamship Edison (The Edison) [1933] AC 449 (HL), a decision of the English
House of Lords where the defendant’s ship had negligently caused the plaintiff’s dredger to sink. In
that case, the plaintiff instituted an action for the cost of the dredger and the cost of hiring a substitute
machine to continue their business. The House of Lords refused to grant the hiring costs of the
machine because it held that this claim arose as a result of the plaintiff’s impecuniousness and not as a
result of the negligent sinking of the dredger by the defendant. On the facts of that case, it appears that
plaintiff hired the machine because it could not afford to purchase a new dredger. The Appellate
Division in Smit v Abrahams held that our law could not take such an inflexible approach as postulated
in the Dredger case.98 The court held that if one applied the flexible criterion of remoteness, then when
applying considerations of ‘policy, reasonableness, fairness and justice’ to the facts of the instant case,
it could not be said that the loss brought about by the hiring of a vehicle for three months was too
remote. The court did not think that this approach created a precedent whereby large concerns could
elect not to insure their assets or their businesses and to claim incidental costs, occasioned by such a
failure to insure, from defendants. The facts of this case, held the court, would in the future be
distinguishable from other cases on the basis of the socio-economic position of the defendant as a low-
income earner.99
So what one sees from the aforementioned cases is again the importance of the factual matrix
that one is working with. The courts are reluctant to lay down hard and fast rules.

J. THE DAMAGES/HARM REQUIREMENT

The prize of a successful delictual claim is a claim for damages. Under the law of delict one is entitled
to be placed in the position one would have been in had the delict not been committed. This requires
one to compare the plaintiff’s patrimony after the delict was committed to the plaintiff’s patrimony
had the delict not been committed. As such, one is entitled to claim loss already suffered and loss that
will emerge in the future.
As is the position in a contractual claim, the plaintiff is duty bound to take steps to prevent loss
which he or she could reasonably have prevented. The law will not excuse the plaintiff who sits idly by
and watches his or her patrimony diminish. Reasonable steps must be taken to prevent further loss.
Where a plaintiff is claiming for loss of income or a loss of profits, she may claim those losses
already suffered and in addition, those losses which will occur in the future.
When quantifying damages, the courts apply the following general rules:
(i) The value of the loss suffered is determined at the date when the delict was committed and not at
the date of trial. However, in exceptional circumstances where something happens between the
date of the delict and the date of the trial which causes an escalation in loss, the court will peg the
value of loss as at the date of trial;
(ii) Once a plaintiff has been compensated from a source other than the wrongdoer (i.e. from a third
party) she cannot claim the value of the self-same loss from the wrongdoer again. To do so would
amount to double compensation, which, generally speaking, the law frowns upon. However, it
must be noted that, as a matter of exception, where an insurance company pays a plaintiff, the
plaintiff is not barred from claiming the loss, already compensated for, from a wrongdoer. But, in
most cases the plaintiff will not be able to do so because of the doctrine of subrogation in the law of
insurance. In almost every type of insurance contract, the insurer usually inserts a clause in the
contract in terms of which the insured agrees that there will be an automatic cession in favour of
the insurance company of the insured’s claim against a wrongdoer once the insurance company
has paid the insured for losses to the insurable interest. The cession of the claim entitles the

98
At 14.
99
At 17.

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insurance company to step into the shoes of the insured as a matter of right, and to institute a claim
against the wrongdoer. Any compensation received is paid to the insurance company as the latter
has already compensated the insured. This ‘stepping into the shoes’ of the insurance company by
virtue of the cession is called subrogation.
(iii) A plaintiff is not expected to prove damages with absolute certainty. Of course, where necessary,
the plaintiff must make use of experts to quantify its loss. But even in those cases where experts
cannot be used, as long as loss can be reasonably quantified the court will not shy away from
granting the damages claimed for. Sometimes a court is required to peer into the future when
making an award. This is especially the case where a plaintiff brings a loss of support claim against
a wrongdoer who has caused the death of a principal breadwinner, or where a plaintiff claims
future medical expenses or future earnings, to name but two further examples. In such cases the
courts award damages by determining the extent to which a person’s life expectation has
diminished, or by making a projection as regards the defendant’s probable income expectation
or how inflation will affect the cost of medical care in the future. It is interesting to note that in
Southern Insurance Association Ltd v Bailey NO 1984 (1) SA 98 (A), the court held that actuarial
assessment should be utilised wherever possible.
(iv) In claims involving loss to property the courts permit the plaintiff to claim the difference between
the market value of the property before the delict and the market value of the property after the
delict was committed. In cases where it may be difficult to prove the market value of the property,
the courts use the costs of repairing/restoring the property as prima facie proof of the diminution
in the value of the property. However, in such instances it is open to the defendant to raise the
argument that the cost of repairing the property exceeds the pre-delict market value of the
property. If the defendant can successfully show that the cost of repairing the property exceeds
the pre-delict market value of the property, the court will order the defendant to pay the pre-
delict market value of the property only.

K. THE ACTION FOR PAIN AND SUFFERING

All the elements of delictual liability discussed above are applicable not only for actions under the actio
legis Aquiliae (i.e. actions for patrimonial loss), but also to actions for pain and suffering.
The action for pain and suffering seeks to compensate a person for physical and psychological
harm. This is a claim for intangible loss, whereas the Aquilian action is premised on tangible loss to the
plaintiff’s estate.
To sustain an action for pain and suffering, negligence is sufficient as the fault element.
Damages are claimed under the following headings: (i) physical pain; (ii) mental suffering; (iii)
disfigurement; (iv) loss of amenities of life; (v) disability and/or loss of health generally; (vi)
diminished life expectancy; and (vii) nervous/emotional shock.
Whilst it is relatively easy for the courts to award damages for patrimonial loss, it is quite
difficult for the courts to compute damages for intangible loss. How does the court determine the value
of pain, or the value of a leg, or the loss of life expectation? Depending on the kind of damages sought,
the courts sometimes apply an objective test and at other times apply a subjective test. Pain is pain,
whether you are the Queen of England or a lowly gravedigger. Therefore, claims for physical pain,
mental suffering and nervous shock are generally determined objectively where the courts apply
standards of reasonableness, justice and equity to place a value on the distress suffered by the victim.
However, claims for disfigurement, loss of amenities of life, loss of expectation of life, and disability are
determined subjectively. A scar on the face of a super model is treated far differently to a scar on the
face of plain Jane in a disfigurement claim. A loss of amenities claim brought by a champion swimmer
who loses a leg or an arm is not treated the same as a loss of amenities claim brought by a couch potato.

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A claim of a young person is considered differently to the claim of an older person in a diminished life
expectancy claim. A claim by a brain surgeon for loss of a hand is treated differently to a claim for the
same harm suffered by a theatre critic.

L. APPORTIONMENT OF DAMAGES
Two drivers are involved in a motor vehicle collision. The one was exceeding the speed limit. The
other was straddling lines. Who is to blame? Well, quite frankly, both are. Should the speeding driver
institute an action against the straddler, the court can in terms of the Apportionment of Damages Act
34 of 1956 apportion damages between two. The court makes an assessment of each person’s degree
of negligence and expresses this as a percentage, and grants judgment accordingly. Thus if the court
finds that the speeding driver was negligent and the straddler was also negligent the court will balance
the fault of each party and it need not add up to 100%. Each party will then recover as follows: the
percentage of the fault that is determined to be the plaintiff’s will be subtracted from the plaintiff’s
claimed damages and the percentage of the fault that is determined to be the defendant’s will be
subtracted from the defendant’s claimed damages.

M. CONCLUSION

As you can well see, the law of delict has many subtle contortions. Often liability is determined on a
casuistic basis. This makes it particularly hard for non-lawyers, and even for lawyers, to predict precise
outcomes. The important thing for your purposes is to appreciate what a delict is, to understand the
various components of delictual liability, and to foresee situations in your own environment where a
delict could arise.

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CHAPTER FOUR
FORMS OF BUSINESS ENTERPRISES
A. INTRODUCTION

I n this chapter we will consider the different kinds of business entities, their juridical nature and
the circumstances under which they, or those in charge of them, attract liability. In particular, we
will consider the law relating to companies, close corporations, business trusts, partnerships and
sole proprietorships as these are the five recognised business entities in South Africa.
Many of the principles which we canvassed in the previous chapters will be applicable to this
chapter as well. For example, the law of contract informs the manner in which these entities enter into
transactions and the law of delict serves as the basis for holding these entities, and those in charge of
them, liable for improper business conduct or fraudulent administration. It is, therefore, imperative
for any person intending to operate one of these entities to have a basic knowledge of the legal
principles pertaining to contract and delict.

B. COMPANIES
(a) Introduction

Companies are governed by the Companies Act 71 of 2008, which came into operation on 1 May
2011. However, it must be noted that companies that were incorporated in terms of the Companies
Act 61 of 1973 continue to function as they did, unless they decide to convert to a company formed in
terms of the 2008 Act. It is for that reason that sometimes the old Act will be discussed in these notes.
As Roman-Dutch commercial law was rather rudimentary and relatively unsophisticated,
South African company law and in fact, the current and previous Companies Acts, by and large, came
to be modelled on English law, which after industrialisation in the 18th century, became the foremost
legal system for recognising and regulating limited liability entities. It therefore comes as no surprise
to note that our courts turn almost exclusively to English law for comparative analysis. Of course, our
courts are not obliged to follow the decisions of English courts – as we are a sovereign nation – but as
English law was the primordial soup from which our law came to evolve, on this occasion, more than
any other, our courts are more inclined to follow the laws of England. Turn to any South African
textbook on company law, or almost any court decision, and you will see an abundance of references
to English law.

(b) Definition

A company is a multifaceted entity. This makes it particularly hard to define. As a working definition
one may say that a company is a business enterprise incorporated in terms of the Companies Act
having separate legal personality with limited liability and enjoying perpetual succession. Let us
consider the legal consequences of each of these definitional elements.

(i) Incorporation

To incorporate (create) a company, one must follow the procedure laid down in the Companies Act.
In essence, the procedure requires:
• Completing and signing, in person or by proxy, a Memorandum of Incorporation;
• Filing a Notice of Incorporation with the prescribed fee along with the Memorandum of
Incorporation.

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The Memorandum of Incorporation contains the company’s name, details of its authorised
share capital, the place of its registered head office and postal address, who its auditors are and its
object(s) (i.e. what kind of business it is going to carry on).
Naturally, if one instructs an attorneys’ firm to incorporate a company, one will have to pay
the attorneys’ firm for their services in this regard.
The Memorandum of Incorporation contains information about the internal governance
arrangements of the company, for example, rights attaching to shares; how directors will be appointed;
the powers of directors and other executive officials; who is authorised to enter into transactions on
behalf of the company; who may institute proceedings on behalf of the company; etc.
As soon as practicable after accepting a filed Notice of Incorporation, the Companies and
Intellectual Property Law Commission (hereinafter referred to as ‘the Commission’) must: assign to
the company a unique registration number; enter the prescribed information concerning the company
into the companies register; endorse the Notice of Incorporation, and, if applicable, the Memorandum
of Incorporation filed with it; and issue and deliver to the company a registration certificate. A
registration certificate is conclusive evidence that all the requirements for the incorporation of the
company have been met. A company is deemed to be incorporated as from the date stated in the
certificate.
Immediately on being incorporated, the company acquires separate juristic personality. The
legal implications of acquiring separate juristic personality will be discussed in more detail very shortly.
It is often necessary for a person(s) to enter into a contract on behalf of a company before it is
incorporated. For example, it may be necessary to enter into a lease agreement to secure premises so
that the company can start trading from the moment of incorporation, or it may be necessary to enter
into employment contracts to secure employees, or it may be necessary to enter into agreements with
prospective clients or business partners. When a person enters into contracts on behalf of a company
yet to be incorporated, we call such contracts pre-incorporation contracts. The Companies Act permits
such contracts. The Act provides that such a contract may be ratified by the company, on
incorporation, in which case the effect will be as if the company had already been incorporated at the
time when the contract was signed. This means that the company will be liable for all the contractual
obligations arising from the contract and, where applicable, it will also be the holder of all rights in
terms of the contract. For ratification, the following requirements must be met:
(a) The contract must be in writing;
(b) The contract must be concluded in the name of, or on behalf of, the company to be formed by a
person who professes that he is acting as the ‘agent or trustee’ of a company yet to be incorporated;
and
(c) The company’s Memorandum of Incorporation may recognise the pre-incorporation contract as
one of its objects at the time when the company is incorporated. However, if the Memorandum of
Incorporation is silent, the company must ratify the contract within 3 months of incorporation. If
it fails to ratify or reject the contract within 3 months, the company will be regarded to have ratified
the contract.

(ii) Separate Legal Personality

People are natural persons. As such, they acquire rights as separate legal persons the moment they are
born. A company is a juristic person. It acquires rights as a separate legal person the moment it is
incorporated. As a separate entity, the company is the owner of its assets. The members do not own a
proportionate share in the property. Only when the company is wound up and the creditors have been
paid, do the members acquire a right to share in the surplus.
Profits made by a company belong to the company. Persons who own shares in the company
(i.e. member shareholders) have a right to share in the profits only when a dividend is declared. Aside

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from being able to share in the profits of a company, shareholders also acquire the right to vote at
general shareholders’ meetings.
As a separate legal person, a company may sue and be sued in its own name. In litigation, the
directors and shareholders of a company are never cited as nominal defendants or plaintiffs. The
company itself is either the plaintiff or the defendant, as the case may be. The ability of a company to
institute proceedings is normally entrenched in the company’s Memorandum. If not entrenched, a
company has to pass a special resolution at the time when litigation arises authorising such
proceedings to be instituted on behalf of the company. It must, furthermore, be noted that persons
who depose to affidavits on behalf of a company must also be authorised to do so. If they are not
authorised to do so, any legal proceedings which rely on affidavits as part of their procedure are
defective. Defects of this kind may be cured by ex post facto ratification by special resolution.
Although a company has separate legal personality, it is not difficult to appreciate that a
company cannot think or form a will as a natural person can. It, therefore, cannot participate in the
commercial world on its own. It acts through agents. The management of a company is usually in the
hands of persons known as directors. Directors may or may not be members (i.e. shareholders) of the
company. It must be noted that membership does not give one an automatic entitlement to assume
control of the management of a company or to represent the company. In company law there is a
separation between management and ownership of a company. As owners of a company, member
shareholders have the ability to hire or fire directors. On the other hand, directors, as managers of a
company, are essentially in control of the day-to-day management of the company. Later in this
chapter we will consider, in more detail, the rights and obligations of directors and how they attract
personal liability when they breach their position of trust as directors.
Legal personality for natural persons ends when a person dies. Legal personality in the case of
a company terminates when a company is wound up, or when it is deregistered.
While legal personality is, by and large, sacrosanct, a court can in certain instances disregard
the legal personality of a company and hold those in charge to account. In terms of section 332(5) of
the Criminal Procedure Act 51 of 1977 for example, a director or servant of a company can be
convicted of a crime for which the company would otherwise be liable, if the director or servant
participated in the perpetration of the crime and did nothing to prevent it when she could have.
Piercing the legal personality of a company to hold an individual liable for an act purportedly
committed by a company is not limited to criminal law. In Elandsheuwel Farming (Pty) Ltd v
Secretary for Inland Revenue 1978 (1) SA 101 (A), a company acquired ownership of a farm. Case
It was common cause that the shareholding of the company was held by one K and four of illustration
his relatives. The five shareholders structured a scheme whereby they sold the farm in such a
way as to evade tax liability. Once the proceeds of the farm were paid to the company, they declared a
dividend and paid the proceeds to themselves. When the Secretary for Inland Revenue instituted a
claim for tax evasion, the shareholders, relying on the separate legal personality of the company, argued
that they were not liable and that the company was. Of course, at this point, the company had
insufficient equity to satisfy the tax avoidance claim. On appeal to the Appellate Division, the court
held that the facts clearly suggested that the sale of the farm was tainted by improper motives. The sale
was not entered into for the benefit of the company. The ‘real intention’ was always to benefit the
shareholders. As such, the court held the shareholders liable in their personal capacities for tax owed
to the fiscus.
There seems to be a general consensus that the courts will only permit a piercing where a
statute provides for it in the particular circumstances or where policy considerations dictate that
corporate personality should be set aside. The Elandsheuwel case is a clear example of where policy
considerations served as the impetus for piercing the corporate veil. By way of further illustration,

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consider the case of Cape Pacific Ltd v Lubner Controlling Investments (Pty) Ltd and Others
1995 (4) SA 790 (A). Case
The facts of the Cape Pacific Ltd case were as follows: L, an astute illustration
businessman, owned shares in F (Pty) Ltd. These shares guaranteed him personal
occupation of a flat in Clifton, Cape Town. In 1976 L became a non-resident and for exchange control
purposes he transferred the shares (‘the Clifton shares’) to LCI (Pty) Ltd. L was neither a shareholder
nor a director of LCI (Pty) Ltd. 100% of LCI (Pty) Ltd’s shares was owned by several children’s trusts
constituted by L’s father, and of which L was one of the trustees. In evidence before the court it was
revealed that L himself appointed one S to be director of LCI (Pty) Ltd and that the said S was for all
intents and purposes L’s yes-man.
In 1979 Cape Pacific Ltd entered into a sale agreement with LCI (Pty) Ltd in terms of which
the former purchased the Clifton shares from the latter. When Cape Pacific Ltd sought transfer of the
shares, LCI (Pty) Ltd refused to do so and L also failed to vacate the flat. In correspondence to Cape
Pacific Ltd, L contended that the flat was his and that he would not vacate it without a fight. Cape
Pacific Ltd then sued LCI (Pty) Ltd for transfer of the shares. Before the dispute between Cape Pacific
and LCI (Pty) Ltd could be settled, LCI (Pty) Ltd transferred the Clifton shares to GLI (Pty) Ltd. It
was common cause that L owned 100% of the shares in GLI (Pty) Ltd and was also a co-director of
the latter. When Cape Pacific Ltd sued GLI (Pty) Ltd for recovery and transfer of the Clifton shares,
the latter argued that it had obtained the shares validly as GLI (Pty) Ltd was a separate legal person
which had acquired the shares in good faith.
The Appellate Division held that there was no doubt that the transfer of the shares to GLI
(Pty) Ltd was intended to frustrate Cape Pacific’s claim against LCI (Pty) Ltd. However, to set aside
the transfer from LCI (Pty) Ltd to GLI (Pty) Ltd the court would have to pierce the corporate veils of
both companies. It was axiomatic from the facts, the court held, that L was pulling the strings in both
companies. The appearance of arm’s length dealing between L and the companies was a sham. L
exerted a position of dominance over both companies. Consequently, the actions of the companies
were to be attributed to him and not to the companies per se. Even though S was the de jure director of
LCI (Pty) Ltd, his appointment was simply one of convenience. At all material times L was in de facto
control of LCI (Pty) Ltd. Furthermore, from the evidence it was clear that the appointment of more
than one director to GLI (Pty) Ltd was a smoke screen to create the illusion of devolved power when
in fact L held absolute sway over the management of the company.
As a matter of policy, held the court, it had to step in and check L’s impropriety by piercing
the corporate veils of both companies.100 By removing the veils it was not difficult to see that the
contrived transfer of the Clifton shares was nothing more than L transferring the shares to himself in
order to frustrate a legitimate claim which Cape Pacific Ltd had in respect of those shares. The court,
therefore, set aside the transfer and ordered the Clifton shares to be conveyed to Cape Pacific Ltd.
The Cape Pacific Ltd and Elandsheuwel cases demonstrate, in primary colours, how separate
juristic personality can be misused by individuals to gain an unfair advantage. But, fortunately justice
is not blind in such instances. Depending on the facts of a case, a court will come to the rescue of those
done in by cunning profiteers. It is interesting to note that section 20(9) of the 2008 Companies Act
specifically entrenches a provision permitting a court to pierce the corporate veil:
If, on application by an interested person or in any proceedings in which a company is involved, a court
finds that the incorporation of the company, any use of the company, or any act by or on behalf of the
company, constitutes an unconscionable abuse of the juristic personality of the company as a separate
entity, the court may –

100
At 804.

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(a) declare that the company is to be deemed not to be a juristic person in respect of any right,
obligation or liability of the company or of a shareholder of the company or, in the case of a
non-profit company, a member of the company, or of another person specified in the
declaration; and
(b) make any further order the court considers appropriate to give effect to a declaration
contemplated in paragraph (a).

(iii) Limited Liability

One of the comforting features of being a director or a shareholder of a company is that, as a general
proposition, one is immune from liability for debts or claims against the company. Creditors may
extract a debt owed to them from the assets of the company only, and not from the personal assets of
directors or shareholders. In legal parlance, this immunity from liability is described as the limited
liability which a company enjoys.
When a company goes insolvent, the directors and shareholders are not liable and the
insolvency of the company has no bearing on their status. And here lies a fundamental difference
between companies and partnerships and sole proprietorships. Partners and sole proprietors are
personally liable for the debts of their enterprises and the insolvency of a partnership or sole
proprietorship affects the estate of each individual partner or proprietor. Their estates will be declared
insolvent when the relevant enterprise of which they are a partner or a proprietor is declared insolvent.
On account of a company’s limited liability, in practice, one will find that people are reluctant
to enter into finance contracts or service agreements with companies whose financial status is not well-
established or with companies which do not readily engender public confidence. Everyone knows that
a company like Telkom or Transnet or, for that matter, Pick ‘n Pay, would not easily succumb to
liquidity problems. However, a company recently formed, whose identity is not well-known and
whose liquidity is questionable will not attract the same level of business confidence. In such cases, it
is quite common for financiers and other contracting partners to insist that the directors, shareholders
or other persons hold themselves personally liable for any credit facilities etc. that may be extended to
the company. This is easily achieved by having the directors, shareholders or other persons enter into
suretyship agreements in terms of which they bind themselves as co-principal debtors in respect of the
debts of the company. Should the company breach its obligations to a contractant, the latter may sue
both the company and the sureties either jointly or severally.
Suretyship agreements aside, there are certain exceptional instances when officers and
shareholders may be personally liable to creditors. This classically happens in three instances. Firstly,
where a company is incorporated in terms of section 8(2)(c) of the Companies Act, the members of
the company are personally liable for the debts of the company. Section 8(2)(c) of the Companies
Act makes provision for the incorporation of a company with personal liability. Such companies have
the suffix Inc at the end of their names. At first blush, it may appear strange for people to elect to form
such companies because it is always better to form a company with limited liability. However, there
are statutes which prohibit certain professionals from forming companies with limited liability. The
Attorneys’ Act 53 of 1979, for example, expressly states that a group of attorneys may not form an
enterprise with limited liability. For attorneys who wish to form a company, their only option is to
form a section 8(2)(c) company. The same applies with estate agents and accountants.
Secondly, in terms of section 66 of the 1973 Companies Act, member shareholders of a public
company were held personally liable to creditors if the company consisted of less than seven members.
In terms of the 1973 Act, for a company to have been a public company (see discussion later), it must
have consisted of at least seven members. Members who failed to abide by this rule were wrapped over
the knuckles by the legislature by the imposition of personal liability. In terms of the 2008 Act, the
notion of a public company still stands. However, it would appear that the numerical restrictions

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relating to the number of members such companies must have has fallen to the wayside. Consequently,
there is no analogous provision to section 66 in the new Act.
Thirdly, in terms of section 77(2) of the Companies Act, directors or officers who breach their
fiduciary duties, owed to the company, by administering the affairs of the company in a fraudulent or
reckless manner, are visited with personal liability. We will consider this point in more detail a little
later on in this chapter.

(iv) Perpetual Succession

When any partner of a partnership dies, the partnership terminates immediately. To restore the
partnership, a new partnership agreement must be entered into between the remaining partners. This
is one of the cumbersome features of a partnership. But, the same does not apply to a company. A
company enjoys perpetual succession. Shareholders may change, officers of the company may come and
go, but this will not affect the continued existence of a company. A close corporation also possesses
this feature, and the same thing can be achieved with a trust.

(c) Shares and share capital

A company raises capital by issuing shares at a fixed price. A member’s ownership of a company is
measured by the amount of shares held by him or her in the company. Aside from ownership, the
particular rights that a member enjoys in a company are also determined by the kind of shares that a
member holds, for it is possible for a company to issue different kinds (classes) of shares and to classify
rights according to the share(s) held.
The common classes of shares are ordinary, preference and deferred shares. Preference shares,
as the term suggests, entitle the holder to more rights than those of ordinary shareholders, either in
the distribution of dividends or the return of share capital in the event of a winding-up. The dividend
that a preference shareholder may receive is fixed, unless it is a participating preference share in which
case the dividend is more akin to receiving interest.
In contrast, an ordinary shareholder is not entitled to a fixed dividend. The dividend which he
or she receives is determined by the profits available for distribution after preference shareholders have
been paid.
Participating preference shareholders get two bites of the cake when a dividend is declared,
for they are entitled to enjoy a fixed dividend (as is their right by virtue of being preference
shareholders) as well as dividends which ordinary shareholders receive from the profits, either pro rata
or after the ordinary shareholders have been paid a certain minimum dividend.
Deferred shareholders occupy the lowest end of the rung when it comes to enjoying dividends,
as they are only entitled to a slice of the cake after a prescribed minimum dividend has been paid to
the ordinary shareholders.
As a company grows in value, the ordinary, deferred and participating preference shares grow
in value, but preference shares do not.
The capital contributed to a company when shareholders subscribe for shares is the share
capital of the company. There is no statutory minimum or maximum limit on the number of shares
that can be made available for purchase. Likewise there is no rule preventing a company from financing
itself through ordinary loans from banks etc. and issuing very few shares.
In the past a company could have issued shares at a nominal value or at par value. A par value
share was simply a share that had a label price attached to it, for example, R1 par value share or R20
par value share.

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The label value attached to a par value share often had no connection to the actual value of the
share. The share could be worth much more than its label price. Because the new Companies Act seeks
to remove misleading practices, it prohibits101 the sale of par value shares.

(d) Types of Companies

Now that we have considered the definitional elements of a company, let us consider the different
types of companies in South Africa.
From a business point of view the two most important types of companies are the public
company and the private company. So let us start off with these two forms and later consider other forms
that may be encountered.

(i) Private Company

This type of company is best suited to smaller types of businesses with relatively small capital
requirements, a limited number of members and a desire not to comply with all the requirements of
disclosure. A private company must have (Pty) Ltd or Proprietary Limited after its name.
To qualify as a private company, the Memorandum of Incorporation should restrict the
transfer of shares. Furthermore, any offer of shares or debentures to the public must be prohibited.102
As mentioned above, where members of the attorneys’ or accountants’ professions decide to
incorporate, they must form a company in terms of section 8(2)(c) of the Companies Act. A section
8(2)(c) company is also a private company. As already stated, it will be recognised by the word
Incorporated or Inc after its name. The difference between this type of private company and other
private companies is that the member shareholders and directors are jointly and severally liable for the
debts of the company.

(ii) Public Company

The name of a public company contains the word Limited or Ltd at the end. The liability of the
members is limited to the amount each member undertakes to contribute in the event of a winding-
up. This amount may not be less than R1.103
The primary differences between a private and a public company can be summarised as follows:
• A private company must, in its Memorandum of Incorporation, restrict the right to transfer its
shares. This is not the case with a public company.
• According to the 1973 Act, a private company had to, in its articles of association, limit the number
of its members (excluding employees and former employees) to 50. One member was sufficient
to constitute the company. A public company, on the other hand, had to have at least 3 members
and there was no maximum number. In terms of the 2008 Act, all the numerical restrictions as
regards members and shareholders have fallen away. However, according to the 2008 Act, a
private company must have at least one director, and a public company must have at least three
directors.104 These seem to be the only numerical restrictions distinguishing these two types of
companies.
• A private company must, in its Memorandum of Incorporation, unlike a public company, prohibit
any offer of its shares or debentures to the public.
• A public company is subject to greater auditing and other regulation than a private company.

101
Companies Act, section 35(2).
102
Companies Act, section 20(1).
103
Companies Act, section 52.
104
Companies Act, section 66.

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A major advantage that a public company has over a private company is the ability to raise
capital from the public by offering its shares to the public at large. Moreover, its shares can be listed on
the Johannesburg Securities Exchange, which makes it easy for would-be purchasers and sellers to
acquire or dispose of shares.

(iii) Non-profit companies105

These are companies constituted ‘not for gain’. They must have a public benefit purpose and to this
extent can promote religion, arts, science, education, charity, recreation or any other cultural or social
activity, or mutual or group interests. Although such a company’s main object is not to make a profit,
it is not prohibited from doing so. Thus a charitable organisation incorporated as a non-profit
company can have a cake sale or open a store and use the profits to further its aims and objects etc.
Since this is not an entity that is used for business purposes, there is no need for us to consider
this type of company in any more detail.

(iv) State-owned Companies

These types of companies were often registered in terms of the 1973 Act. However, the Act did not
specifically recognise such companies. Consequently, the Act did not have special provisions to deal
with the unique aspects of state-owned companies. The 2008 Act, however, specifically recognises
such companies and contains special provisions to ensure that these companies fulfil their public
mandates and are governed properly. Since these types of companies are not relevant for our purposes,
no more needs to be said about them.

(v) A company limited by guarantee

Under the 1973 Act, such a company had the words Limited by Guarantee after its name. A company
limited by guarantee was not permitted to raise capital by issuing shares and had to rely on loans,
donations and subsidies to raise capital. Since this form of company was not used much for business
purposes in South Africa, it comes as no surprise that the 2008 Act makes no mention of it.

(vi) Share block companies

These are regulated by the Share Blocks Control Act 59 of 1980. Membership to a share block
company entitles a member to rights of occupation of property owned by or leased to the company.
On account of its specific purpose, this form of company is not regarded as a particularly important
form of business enterprise. Accordingly, there is no need to treat this form of company in any more
detail.

(e) Conversion of Companies

Under the 1973 Act, it was possible to convert a company from one type to another, but:
- it was not permissible to convert a section 21 (non-profit)106 company to anything else;
- in the case of private and public companies, a special resolution was required to authorise the
conversion;
- in the case of public companies, notice of the conversion had to be published in the Government
Gazette and all the creditors of the company had to be informed; and

105
Companies Act, section 10.
106
Now a ‘section 10 company’ in terms of the 2008 Act.

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- in the case of the conversion of a section 53(b)107 company, further requirements were required.
These were set out in section 56 of the 1973 Companies Act.
The 2008 Act only contains express provisions to convert a close corporation to a company.108
The Act makes no mention of the possibility of converting from one form of company to another. It
would thus appear that if a company wanted to “convert” to another form of company, it would have
to deregister itself and re-register in its new form, complying, of course, with all the requirements for
re-registration. However, some company law experts believe that even though the Act is not explicit,
a conversion is possible by amending the Memorandum of Incorporation. The amended
Memorandum will, of course, have to be lodged with the Commission and notice will have to be given
to creditors. Time will tell how the Act is interpreted.

(f) A company acting ultra vires its objects

As noted earlier, a company cannot form a will or transact business on its own. It relies on officials to
do its bidding. These officials are expected to ensure that the company realises its main object. The
main object of a company is articulated in the Memorandum of Incorporation, which is a public
document and is technically accessible to the general public to peruse. The reality is that members of
the public are not particularly excited to read memoranda. So, what happens when a member of the
public innocently and in good faith enters into a transaction with a company in conflict with its main
objects?
Under the common law, a contract/transaction in conflict with a company’s objects clause is
considered void on the ground that the transaction in question is ultra vires (literally meaning ‘beyond
its power’). Neither of the parties can enforce performance in terms of the invalid contract and
restitution has to take place. If restitution of the performances themselves is impossible, a monetary
claim based on unjustified enrichment must suffice. A delictual claim cannot be brought against the
company in such an instance.
In order to justify the existence of the ultra vires doctrine – despite its unfair results – the
common law holds that the doctrine protects shareholders and creditors against the possible abuse of
power by company officials, most notably directors. Furthermore, it is argued that the innocent party
has only himself to blame for transacting with a company without reading the company’s
Memorandum. Because a company’s Memorandum is a public document, so the argument goes, the
innocent party is deemed to have constructive notice of its contents even though he or she may never
have read it.
The harshness of the common-law position has, to a large extent, been ameliorated by section
20(1) of the Companies Act. To this extent, the section provides that no act of a company will be void
by reason only of the fact that the company was without power or capacity to act in the manner that it
did. Neither the company nor the third party may avoid its/his/her contractual obligations by relying
on the defence that the company acted beyond its capacity. Although the section seeks to do away
with the harsh consequences of the ultra vires doctrine, it remains mindful of the need to protect
shareholders and creditors against the unbridled abuse of power by directors. In a bid to protect the
shareholders and creditors, the directors who enter into, or who endorse, the ultra vires transaction
can, in terms of section 20(6), be held personally liable by the company for breaching their fiduciary
duties. Section 20, therefore, marks a departure from the common-law position, but provides the
company with a remedy against the directors. In the unfortunate event of the directors being persons
of straw, the company will inevitably suffer the brunt.

107
Now a 'section 8(2)(c) company' in terms of the 2008 Act.
108
Companies Act, Schedule 2.

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(g) Agents acting beyond their ostensible authority

In terms of the basic principles of agency law, a company will only be bound by the actions of its agent
if the agent acted within the course and scope of her authority. Should the agent act without authority,
or should the agent act beyond her authority, the principal (in this case, a company) can incur liability
if estoppel is established or if the principal ratifies the conduct of the agent.
According to the doctrine of estoppel, a principal is blocked from asserting that an agent did
not have authority if it is shown that (a) the principal made a representation that the agent had
authority to enter into transactions generally; (b) the innocent party relied on that representation; and
(c) that reliance caused the innocent party to transact to his prejudice.
As far as ratification is concerned, there has to be an express or implied act on the part of the
principal endorsing the agent’s transaction. It stands to reason, therefore, that for ratification to apply
the principal must perform some overt act, whereas in the case of estoppel it is sufficient, in order to
hold the principal liable, that it can be shown that the principal created an impression that the agent
was generally authorised to enter into the transaction concerned. In the case of company executives,
who are generally held out by companies to possess authority to enter into all sorts of transactions on
behalf of a company, the operation of estoppel is not all that difficult to prove.
In light of the relative ease with which the doctrine of estoppel can be activated, the common
law has found a way of restraining the application of the doctrine. Because the authority of agents is
usually entrenched in the Memorandum of Incorporation of a company, here again the common law
applies the doctrine of constructive notice to prevent a person from enforcing a defective transaction
if the agent’s powers were clearly stipulated in the Memorandum of Incorporation of the company. In such
a case, the third party is deemed to have been aware of the limitations attendant to the agent’s
authority, even though the third party may not have read the Memorandum. A contract entered into
by an agent lacking authority, but whose authority was clearly stipulated in the Memorandum of
Incorporation – thereby activating the doctrine of constructive notice and neutralising the doctrine of
estoppel – is void. Neither of the parties can enforce performance in terms of the invalid contract and
restitution has to take place. If restitution is impossible, a claim based on unjust enrichment must
suffice. A delictual claim cannot be brought against the company in such an instance.
Whereas the legislature has stepped in to ameliorate the harshness of the common law when
a company acts ultra vires, the same has not happened in the case of an agent who acts beyond his
authority as clarified in the Memorandum of Incorporation. The common law, as stated above, rescues
the company at the expense of the innocent party.
The difficulty with the application of the doctrine of constructive notice is that it is not always
possible for a third party to tell whether an agent, who has been given general authority in the
Memorandum of Incorporation to enter into transactions, has in fact been mandated to enter into the
particular transaction in question. Memoranda sometimes provide that an agent may enter into certain
transactions only after he has received authorisation from the board in general meeting. As publicity
is not normally given to instances where internal requirements are complied with, a third party would
not be able to determine, by simply perusing the public documents of the company, whether an agent’s
authority to act in a particular case has been sanctioned. Should an internal requirement not be met, it
seems rather unfair for the company to evade liability by relying on the doctrine of constructive notice.
In order to remedy this rather unsatisfactory situation, our courts have come to rely on the rule
formulated by an English court in Royal British Bank v Turquand 1843 60 All ER 435. The ‘Turquand
rule,’ as it has come to be known, dictates that an outsider who contracts with a company in good faith
is entitled to assume that the internal requirements have been complied with and he is not expected
to make any further enquiries. The company will, thus, be bound even if the internal requirements

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have not been met or an internal irregularity has occurred, resulting in the agent’s authority being
legally defective.
The Turquand rule only protects bona fide third parties. Thus it cannot be relied on by an
outsider if he is aware of the irregularity or has constructive notice that the agent purporting to act on
behalf of the company was in fact acting beyond her authority, or circumstances are such as to place
him on guard, for instance, where a particular individual performs an act which is not normally
associated with his office or position. The Turquand rule can only apply to agents who have been
appointed to the position of representative. Where such appointment has not been made at all, the
Turquand rule cannot be applied. Under the 2008 Act, it would appear that section 20(7) expressly
endorses the Turquand rule.

(h) Directors

The 1973 Companies Act did not define a director. However, the 2008 Act does. It states that
‘director’ means a member of the board of a company, or an alternate director of a company, and
includes any person occupying the position of a director or alternate director. The 2008 Act defines
an ‘alternate director’ as a person elected or appointed to serve, as the occasion requires, as a member
of the board of a company in substitution for a particular elected or appointed director of that
company.
In this section we will consider the fiduciary duties of directors, the basis for holding them liable for
breach of their fiduciary duties, the validity of contracts between a director and a company, and a
director’s duty to act with care and skill.

(i) Fiduciary duties

A director is in a fiduciary position vis-à-vis a company. As such she must separate her own interests
from those of the company. She must ensure that conflicts between her own interests and those of the
company do not arise. This can, of course, be quite a challenge. So, to protect the company, its
creditors, and shareholders against potential abuse of power, directors are subject to stringent
fiduciary duties.
If, as a result of a director’s breach of her fiduciary duties, the company suffers loss, or the
director is benefited, the amount of such loss or benefit may be recovered from the director. It is also
possible for the transaction to be declared void or to remove the director from office.
A provision in the Memorandum of Incorporation which purports to exempt a director from
liability in respect of any breach of trust will be void and severed from the document concerned.

(ii) The basis of liability

A director who breaches his or her fiduciary duties is liable both in terms of the common law and
statute. Section 77(2)(a) of the Companies Act entrenches the liability of directors for fraudulent
activity, which is also a breach of trust. The section provides as follows:
‘A director of a company may be held liable –
(a) in accordance with the principles of the common law relating to breach of a fiduciary duty, for any loss,
damages or costs sustained by the company as a consequence of any breach by the director of a duty
contemplated in sections 75, 76(2) or 76(3)(a) or (b).’

Section 77 must be read with section 76 which contains detailed provisions as regards
acceptable standards of conduct of directors.

(iii) Important fiduciary duties

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In terms of the common law, a director’s liability for breach of trust is not based on contract or delict,
but is sui generis (literally meaning ‘of its own kind’). It is based on the premise that the director has
violated his particular relationship of trust.
To a large extent, a director’s fiduciary duty under the common law has been influenced by
the law of agency. The common-law principles have, of course, been supplemented by statutory
regulations, the most significant being sections 76 and 77 of the Companies Act.
The general standard underlying the director’s fiduciary duty at common law is the
requirement for a director to act in good faith and in the company’s interests. Flowing from the general
standard to act honestly and in good faith, a director must:
• exercise her powers in the interest and to the benefit of the company. This means that the director must
prefer the interests of the company over and above the interests of employees, creditors and the
majority of shareholders.
• act within the limits of his power. A director who acts beyond his authority or contrary to the
Memorandum of Incorporation may be liable to the company. In the case of the director entering
into a contract which he is not authorised to enter into, this liability exists whether or not the
company is bound to the contract.
• maintain and exercise an unfettered discretion. A director should, at all times, be free to make a
decision which he thinks is in the best interest of the company. Therefore, any agreement in terms
of which a director binds himself to vote in a particular way constitutes a breach of trust and is
unenforceable.
• exercise a power for the purpose for which it was vested. Even if directors are convinced that it is in
the best interests of the company, they may not issue shares to themselves or to other groups in
order to secure their own positions or to prevent a take-over.
• not make a secret profit. A profit is regarded as secret if it accrues to a director by virtue of her official
position without the general meeting’s consent. Even if the director has acted in good faith and
acquired the profit openly, such profit may be claimed from him, despite the fact that the company
has not suffered any loss. Furthermore, according to the Insider Trading Act 135 of 1998, directors
and other persons are prohibited from dealing in a security by relying on unpublished price-
sensitive information in respect of that security.109
• not pass on confidential information to a competitor. Directors are not prevented from serving on the
board of directors of a competitor. However, confidential information of one company may not
be passed to another company. In practice, however, because serving on the board of directors of
a competitor is more likely to place a director in a position of conflict, most companies will prohibit
such a possibility.

Due to the fact that directors will inevitably play a dominant role in the running of a company,
the possibility exists that they may obtain an advantage by virtue of their position that they might
otherwise not have acquired. According to the 1973 Companies Act,110 directors were prohibited from
receiving loans and security in connection with transactions by a director, his holding company, and
subsidiary. However, according to section 44 of the 2008 Act, directors can acquire financial assistance
from a company provided that approval has been obtained by special resolution of the shareholders
and the loan does not affect the liquidity and solvency of the company. The terms of the loan must
also be fair and reasonable to the company.

109
Insider Trading Act, section 2.
110
Companies Act, section 226.

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(iv) Contract between a director and a company

Under the 2008 Act, there are several instances mentioned where a director is capable of entering into
a contract with a company. Depending on the type of contract and the circumstances under which it
is entered into, a contract will have to be approved or ratified by the board of directors, or by special
resolution of shareholders, or both.

(v) The duty to act with care and skill

The common-law duty to act with care and skill is specifically entrenched in section 76 of the 2008 Act.
To this extent sections 76(3), 76(4) and 76(5) provide:
‘(3) Subject to subsections (4) and (5), a director of a company, when acting in that capacity, must exercise the
powers and perform the functions of director –
(a) in good faith and for a proper purpose;
(b) in the best interests of the company; and
(c) with the degree of care, skill and diligence that may reasonably be expected of a person –
(i) carrying out the same functions in relation to the company as those carried out by that director; and
(ii) having the general knowledge, skill and experience of that director.
(4) In respect of any particular matter arising in the exercise of the powers or the performance of the functions
of director, a particular director of a company –
(a) will have satisfied the obligations of subsection (3)(b) and (c) if—
(i) the director has taken reasonably diligent steps to become informed about the matter;
(ii) either –
(aa) the director had no material personal financial interest in the subject matter of the
decision, and had no reasonable basis to know that any related person had a personal financial
interest in the matter; or
(bb) the director complied with the requirements of section 75 with respect to any interest
contemplated in subparagraph (aa); and
(iii) the director made a decision, or supported the decision of a committee or the board, with regard
to that matter, and the director had a rational basis for believing, and did believe, that the decision was
in the best interests of the company; and
(b) is entitled to rely on –
(i) the performance by any of the persons—
(aa) referred to in subsection (5); or
(bb) to whom the board may reasonably have delegated, formally or informally by course of
conduct, the authority or duty to perform one or more of the board’s functions that are
delegable under applicable law; and
(ii) any information, opinions, recommendations, reports or statements, including financial statements
and other financial data, prepared or presented by any of the persons specified in subsection (5).
(5) To the extent contemplated in subsection (4)(b), a director is entitled to rely on –
(a) one or more employees of the company whom the director reasonably believes to be reliable and competent
in the functions performed or the information, opinions, reports or statements provided;
(b) legal counsel, accountants, or other professional persons retained by the company, the board or a committee
as to matters involving skills or expertise that the director reasonably believes are matters –
(i) within the particular person’s professional or expert competence; or
(ii) as to which the particular person merits confidence; or
(c) a committee of the board of which the director is not a member, unless the director has reason to believe
that the actions of the committee do not merit confidence.’

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C. CLOSE CORPORATIONS
(a) Introduction

Close Corporations are governed by the Close Corporations Act 69 of 1984. They are recognised by
the letters CC after their names. Close Corporations used to be popular business entities in South
Africa. They were in many respects similar to companies, but were simpler and cheaper to operate and
administer. Their introduction in South Africa was motivated by the perceived need to provide a
suitable business vehicle for people with small businesses who wanted all the benefits of corporate
personality.
After the coming into operation on 1 May 2011 of the Companies Act of 2008, one is no longer
permitted to register a new close corporation in South Africa. All existing close corporations will
continue to exist, until such time as they voluntarily decide to convert to companies.
The legislature did away with the close corporation as a business entity because the legislature
has lessened the administrative and regulatory burdens on private companies. It was also felt that the
business landscape needed to be streamlined.

(b) Characteristics

A CC enjoys the following characteristics:

• On registration, it is endowed with legal personality and acquires all the benefits associated
therewith.
• The capacity of a CC is not limited. As such, it notionally has the same capacity and powers as a
natural person of full capacity.
• There is, in principle, no separation between ownership and management. The members own the
CC and they also manage it. However, this is not to suggest that members are in any way liable for
the debts of the CC in their personal capacities, for a CC, like a company, enjoys limited liability.
• The formation and administration of a CC was subject to very few formalities. A limited number
of documents had to be lodged for registration which made the CC much cheaper to incorporate
than a company.
• The maximum number of members is 10, and only natural persons may acquire membership.
• No shares are issued and hence no share capital exists.
• The strict requirements for the maintenance of capital are considerably relaxed in the case of a
CC.
• In order to protect outsiders against maladministration, members of a CC may incur personal
liability when they fail to comply with certain requirements.
• Because provision is made for optional association and other agreements, the structure is flexible
to take into account the needs of different businesses.
• Common-law rules relating to the relationship between a CC, its members and third parties are
expressly incorporated into the Act. This ensures that members have fair knowledge of the rules.
• Although a CC, like a company, is required to appoint an accounting officer, submit financial
statements and balance sheets, and so forth, it is not subject to a compulsory audit. The accounting
officer need not be qualified as an auditor, and even a member could, with the consent of all the
other members, be appointed as an accounting officer.

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(c) Formation and conversions

The Close Corporations Act laid down a straightforward and inexpensive procedure for the
registration of a close corporation. Any one or more persons, not exceeding 10, could form a CC and
secure its incorporation by registering a founding statement which had to be lodged with the Registrar
of Close Corporations upon payment of a prescribed fee.
The founding statement had to contain the following information:
• The full name of the CC, as well as a shortened form of the name, if the parties so desired;
• The principal place of business of the CC;
• The postal address and physical address of its registered head office;
• The full name and identity number of each member;
• The size, expressed as a percentage, of each member’s interest in the CC;
• Particulars of the contribution made by each member with a statement of the fair value of any
property;
• The name and address of the person who has consented to be the accounting officer; and
• The date of the financial year end of the CC.
A founding statement may be amended from time to time. If the amendment relates to a
change of any of the aforementioned information, the amended founding statement must be lodged
with the Registrar within 28 days of the amendment. Failure to lodge the amendment within this
prescribed time attracts a fine.
Any member of the public may inspect the founding statement of the CC either at the registered
head office of the CC or at the office of the Companies and Intellectual Property Commission
(formerly, the Registrar of Close Corporations). However, fundamentally, section 17 of the Close
Corporations Act provides that no person will be deemed to have knowledge of the contents of a
founding statement. This means that the doctrine of constructive notice is not applicable to third
parties when dealing with a CC.
In terms of the 2008 Companies Act, where a CC wants to convert to a company, the CC must
file a notice of conversion in the prescribed manner and form. This may be done at any time. A notice
of conversion must be accompanied by a certified copy of a special resolution approving the
conversion of the CC, a Memorandum of Incorporation and the prescribed filing fee. Upon
conversion of the CC, the Commission must cancel the registration of that CC in terms of the CC Act,
give notice in the Government Gazette of the conversion of the CC into a company and must instruct
the Registrar of Deeds to effect the necessary changes to the entity’s name.111

(d) Pre-incorporation contracts

As with companies, a CC only acquires legal personality as a separate juristic person when it is
incorporated. Therefore, as is the case with companies, agents of the CC could enter into contracts on
behalf of the CC pending its incorporation.
On incorporation, the CC could ratify a pre-incorporation contract entered into on its behalf.
For ratification the following requirements had to be met:
• The contract had to be in writing; and
• The contract must have been entered into by a person professing to act as an agent or trustee of
the CC yet to be formed.
If the above requirements were met, a contract could be ratified after the CC’s incorporation.
Ratification had to be effected by written consent of all the members. Usually a contract would have

111
Companies Act, Schedule 2.

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specified the time within which it had to be ratified. If no time was specified in the contract, then
ratification had to occur within a reasonable time. The effect of ratification on the contract was the
same as if the contract was entered into at the time when the CC was duly incorporated.

(e) Legal personality

To reiterate the position, a CC is also a separate legal person and is accordingly capable of acquiring
its own rights and incurring its own obligations. It can sue and be sued in its own name. Ownership of
all assets vests in the CC and not with its members. Profits and losses accrue to, and are incurred by,
the CC. Like a company, a CC is also capable of incurring both delictual and criminal liability.

(f) Limited liability

The legal personality of a CC made it an attractive business vehicle. One of the consequences of legal
personality is that members’ personal estates are shielded from claims from creditors, who can only
look to the CC’s assets for satisfaction of their claims. It may, however, be that members or others have
personally guaranteed payment of a creditor’s claim in which case they will then attract liability in their
personal capacities. For example, in granting a loan to a CC, a bank may have insisted on members or
others signing personal suretyships guaranteeing repayment of the loan in the event of the CC being
unable to do so.

(g) Perpetual succession

Another similar feature shared by CCs and companies is the fact that a CC also enjoys the benefits of
perpetual succession. Members may come and go and the CC will carry on unaffected.

(h) Association agreement

A close corporation was not required to lodge articles of association at the time of incorporation and
it was, therefore, not necessary for members to draw up an association agreement. However, in most
cases members entered into such an agreement to formalise the relationship between themselves and
the close corporation. In it, they, inter alia, determined who would bring what to the business, when
and how profits would be divided, their respective rights and obligations etc. The Close Corporations
Act contains no provisions relating to the contents of such an agreement. All that it says is that the
association agreement may not be in conflict with the provisions of the Act.112

(i) Member’s interest

A member does not acquire shares in a CC, but rather an interest based on his original contribution to
the CC. This contribution may be in the form of money or it may take the form of an undertaking to
provide services to the CC. A member’s interest is a single interest expressed as a percentage and it is
not required for the interest to be in proportion to his contribution, as long as the aggregate of the
entire members’ interests in the CC amounts to no less and no more than 100%. It is not permissible
for two or more people to be joint holders of the same interest.
A member’s interest may be disposed of or sold by the member, subject to the following:
• The disposal must be done in accordance with the association agreement, if one exists. For
instance, the association agreement may provide for a pre-emptive right in favour of existing
members. The effect of this is that before a member’s interest can be disposed of to an outsider,

112
Close Corporations Act, section 44(1)(b).

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the existing members should be given first preference to acquire the member’s interest at a
determined price;
• If the association agreement contains no provisions restricting disposal, then in terms of section
37 of the Close Corporations Act, the disposition must be effected with the consent of every other
member of the corporation. It is clear, therefore, that every member has the right to veto such
disposition even where it would not result in the admission of a new member.
Where a member dies, his interest devolves to his deceased estate and if the interest is
bequeathed to an heir, the latter inherits the interest. However, if no heir is appointed the interest may
be sold, but once again the sale is subject to conditions contained in the association agreement and
section 37 of the Close Corporations Act. The ability of members to frustrate a sale of a member’s
interest on death can cause the administration of estates process to grind to a halt. For this reason most
association agreements make provision for what is termed key-man insurance policies. Where an
association agreement contains a key-man provision, the CC will be authorised to insure the lives of
each of its members. On the death of a member, the proceeds of the insurance policy (the key-man
policy) will be paid to the CC which will entitle it to purchase the deceased’s member’s interest and to
proportionally distribute the deceased’s interests between the remaining members.
It goes without saying that when a member goes insolvent, his interest forms part of his
insolvent estate.

(j) Management of the CC

Members are free, in the association agreement, to regulate their capacity to share in the management
of the CC. Unless the association agreement dictates otherwise, all decisions are taken by majority
vote.
Section 46 of the Close Corporations Act requires that some decisions be made with the
written consent of a member, or members, holding an interest of at least 75% of the members’ interest.
These relate to: (i) a change in the principal business of the CC; (ii) a disposal of a substantial portion
of its assets; and (iii) the acquisition or disposal of immovable property by the CC.

(k) Conflict between members vis-à-vis each other or the CC

Section 49 of the Close Corporations Act provides that any member of a corporation who alleges that
any particular act or omission of the corporation or of one or more members is unfairly prejudicial,
unjust or inequitable to him, or to some members including him, or that the affairs of the close
corporation are being conducted in a manner unfairly prejudicial, unjust or inequitable to him, or
some members including him, may apply to court for relief.

(l) Agency

As one is dealing with a juristic person, a CC of necessity has to act through representatives.
Unless there is a provision to the contrary in an association agreement, members of a CC have
equal rights to represent a CC. Although internal restrictions on their capacity to represent the
corporation are binding on the members between themselves, they have no operation against
outsiders who have no actual knowledge of the restriction. It will be recalled that an association
agreement is not a public document, and hence the doctrine of constructive notice is not applicable.
And even if it were a public document, it will also be recalled that the Close Corporations Act
specifically excludes the operation of the doctrine in so far as the doctrine could have been applicable
to the founding documents of the CC. Flowing from this, section 54 of the Close Corporations Act
expressly provides that every member of a CC is deemed to be acting as an agent of the CC when
transacting with a third party. The section furthermore provides that any act performed by a member

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will bind the CC unless (i) that member had in fact no authority to act for the CC in the particular
matter; AND (ii) the third party knows, or ought reasonably to have known, of the member’s lack of
authority.

(m) The duty to act with care and skill and the fiduciary duties of members

Members owe a close corporation a duty of care and skill as directors do in a company. Every member
must, in relation to the CC, act honestly and in good faith, and in particular, must exercise his or her
powers in the interest, and for the benefit, of the CC.
A member must avoid any material conflict between his own interest and the interests of the
CC. To this extent, he must not derive any personal economic benefit at the expense of the corporation
or his fellow members. He must, at the earliest opportunity, inform every other member of the nature
and extent of any direct or indirect material interest which he may have in a contract or other business
dealing. He must also refrain from competing with the corporation in its business activities.
Where a member fails to disclose an interest in a contract, the contract is voidable at the
instance of the CC. However, any interested third party may approach a court for relief. If the court
finds that a third party entered into a contract oblivious of the breach of trust perpetrated by the
member, the court can uphold the contract, in which case the CC may bring an action against the
member for any loss occasioned by his breach of trust.
In terms of section 42 of the Close Corporations Act, a CC may hold a member personally
liable if he breaches his fiduciary duties. Any economic benefit derived from such a breach may be
claimed by the CC. A member who acts negligently in the performance of his duties is also liable to
the CC. The test is that of a reasonable member of his knowledge and experience.
If it appears that the business of a CC was or is being carried on recklessly, with gross negligence,
or with the intent to defraud creditors, or for any fraudulent purpose, a court may, in terms of section
64 of the Close Corporations Act, on application by the Master of the High Court, or a creditor, or
liquidator, declare any person who was knowingly a party to such activities personally liable for all or
any debts or other liabilities of the CC.

(n) Abuse of close corporations

Sections 65 and 81 of the Close Corporations Act empower a court to pierce the corporate veil of a
CC where it appears that the separate legal personality of the CC is being abused.

D. BUSINESS TRUSTS

(a) Introduction

A trust has myriad uses. It is often resorted to for estate planning purposes, facilitating share incentive
schemes, providing an investment vehicle, or furthering some charitable or public purpose. Trusts are
governed partially by the Trust Property Control Act 57 of 1988, but largely by the common law. A
business trust is simply a trust created for the object of carrying on a business for the benefit of trust
beneficiaries.
A business trust involves the transfer of a business, or the funds to start up a business, to a
trustee who is to carry on the business for the benefit of trust beneficiaries. Ownership of the business
and all its assets vests in the trustee. The trustee does not acquire beneficial or actual ownership, but
is treated as legal owner for the sake of convenience.
One must draw a distinction between an ownership trust and a bewind trust. With a bewind
trust, ownership of the trust assets vests in the beneficiaries and the trustee simply administers the trust

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on their behalf. However, with an ownership trust, the trustee is the legal owner. Business trusts are
classically ownership trusts. Bewind trusts are used for other purposes and hence, there is no need for
us to consider them in any more detail.
It is interesting to note that the South African law of trusts is also influenced by English law.
However, unlike company law where English law is highly influential, in the law of trusts there are
certain material differences between English law and South African law, which render these two legal
systems incongruent. These material differences owe their existence to the fact that the English law of
property is based on principles of equity and is also largely influenced by Germanic and, to a lesser
extent, French law, whereas South African property law is largely based on Roman-Dutch law with
some traces of Germanic law.

(b) Formation

A trust can either be formed inter vivos or in accordance with the wishes of a testator expressed in a
will. The latter is known as a testamentary trust.
An inter vivos trust is created during the lifetime of the donor (founder) and comes about as a
result of a contract between the donor, trustees and the beneficiaries. A testamentary trust is a bequest,
by a testator to his beneficiaries, to be administered by a trustee. Depending on the terms of a will, a
testamentary trust can either be a bewind trust or an ownership trust. However, where a testator
intends to form a business trust by way of bequest, the trust will be construed as an ownership trust,
with the trustee as the legal owner of the assets.
The terms of an inter vivos trust are stated in a trust deed, whereas the terms of a testamentary
trust are initially set out in a will and later entrenched in a trust deed. In both instances the deed is
registered with the Master of the High Court. Each provincial division of the High Court has a Master’s
office allocated to it. One of the functions of the Master is to exercise a supervisory function over trusts.
Once the Master’s office accepts a trust deed and does not object to its contents, the Master
assigns a trust number to the deed, and hail presto: a trust is born.

(c) No legal personality

A trust also has separate legal personality. However, its legal personality is different to that of
companies and close corporations. A trust is not a juristic person. It is also not a natural person,
although it is usually constituted for the benefit of natural persons. According to the common law, a
trust is a sui generis entity (literally meaning ‘of its own kind’).
As a sui generis institution, the debts of the trust do not accrue to the trustees or to beneficiaries
or, for that matter, the donor. The trust, as an entity, is liable for its own debts. However, it cannot sue
and be sued in its own name. When a trust sues, or is being sued, the trustee(s) ‘acting in his/their
representative capacity’ must be cited in the court papers. Furthermore, unlike a company or close
corporation which can hold property in its own name, a trust cannot. Property is registered in the name
of the trustee who holds the property on behalf of the trust.

(d) Limited Liability

As stated above, a trust is liable for its own debts. A trust’s creditors can only look to the trust’s assets
to satisfy a claim.

(e) Perpetual succession

Whereas companies and close corporations enjoy perpetual succession as a matter of course, the
perpetual succession of a trust is dependent on the deed creating it. Depending on the terms of a trust

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deed, it is possible for a trust to endure forever. Trustees may come and go and beneficiaries may
change over time, but a trust may continue in perpetuity.

(f) Trustees and their liability

Trustees will initially be appointed by the donor, and their identities entrenched in the deed of trust.
A change of trusteeship will also be governed by the trust deed, and if there are no provisions in the
trust deed to indicate what is to happen when a trustee dies, resigns or is unable to take up the office
of trustee, the Master of the High Court, in terms of the Trust Property Control Act, is empowered to
appoint suitable trustees. Any decision of the Master in this regard may be taken on review to the High
Court.
Although the position is not altogether certain, it seems that the maximum number of trustees
that can be appointed to administer a trust is twenty. What is certain though is that the minimum
number is one. However, courts prefer situations where more than one trustee is appointed so that
they can keep each other in check. There is nothing in the common law preventing the donor
(founder) of a trust from being a trustee and also a beneficiary. However, the donor cannot be a trustee
and sole beneficiary.
No special skill or expertise is required to assume the office of trustee. However, a trustee must
act with care and skill and, to this extent, he also owes – as do directors and members of close
corporations – fiduciary duties to the trust that he administers.
Being in a fiduciary position, he must act in utmost good faith. He must be impartial and must
avoid conflicts of interest. He must keep trust property separate from his own, and must also keep
proper books of account. If a trustee fails to account for the affairs of a trust, any beneficiary may, in
terms of the common law, bring an action obliging the trustee to render an account.
Trustees who fail to comply with their duties or fail to exercise the care and skill required of
them are guilty of breach of trust. They can be sued in the law of delict for losses occasioned by their
breach of trust. Furthermore, they can be criminally charged for theft or fraudulent activity.

(g) Advantages and disadvantages of business trusts

Advantages:

• A trust’s liability to creditors is limited to its assets;

• It can enjoy perpetual succession;
• It is flexible;
• There are hardly any statutory requirements to comply with;
• There are minor administrative formalities; and
• They have certain estate duty and tax benefits. This all depends on how the trust is structured. To
get the most from this benefit, proper financial and legal advice is needed at the time of formation
of the trust.

Disadvantage:

The law relating to business trusts is not readily discernible. The law is contained in the common law
which makes it quite hard for people not conversant with the law to determine precisely all the legal
implications and consequences of forming a business trust. Companies and close corporations, on the

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other hand, fare much better in this regard as the Companies Act and the Close Corporations Act
contain a virtual codification of the law relating to those business entities.

E. PARTNERSHIPS
(a) Introduction

A partnership is a business enterprise created by agreement. In terms of the agreement each partner
must assent to carry on a business, to which each makes a contribution, for the joint benefit of the
partners, with a view to making a profit.
Two or more persons, but not more than twenty, may form a partnership to run a business.
However, in terms of statute, attorneys, accountants and architects may operate partnerships in excess
of twenty persons.
Parties to a partnership need not be natural persons. Even a juristic person, such as a company,
can be a partner.

(b) Formation and regulation

A partnership is formed by agreement. There are no formalities for the agreement. It may be made
orally or even tacitly.
Partnerships are governed by the common law.

(c) No separate legal personality

A partnership does not enjoy separate legal personality. It cannot acquire rights or incur obligations in
its own name. Assets of the partnership are owned by the partners in undivided shares.
Although a partnership does not have legal personality, it can sue and be sued in its own name
for the sake of procedural convenience. However, the citation of a partnership in legal proceedings
does not elevate it to a juristic person. When the court delivers judgment for or against a partnership,
the judgment is capable of being executed by or against the partners in their personal capacities.

(d) No limited liability

With the exception of extraordinary partnerships (dealt with below), partners are jointly and severally
liable in their personal capacities for claims against the partnership. There is no separation between
the assets of the partnership and the assets of the individual partners.
In the normal course, a creditor who obtains judgment against a partnership will first proceed
to extract the debt from the partnership assets and, if these prove to be insufficient, will then proceed
to extract the debt from the personal assets of one or all of the partners individually or collectively.

(e) Sequestration

Sequestration of a partner’s estate has the effect of terminating a partnership. If a partner is

sequestrated in his personal capacity, the estates of his fellow partners are not affected. However, if the
partnership is sequestrated, then the estates of each partner are also sequestrated and creditors are
entitled to recover amounts owing to them by attaching the assets of the partnership and, if these prove
to be insufficient, the assets of each partner.

(f) No perpetual succession

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A partnership does not enjoy the attribute of perpetual succession. If a partner ceases to be a partner,
or dies, the partnership comes to an end and has to be reconstituted.

(g) Extraordinary partnerships

The law provides for two extraordinary partnerships: the anonymous partnership and the en commendite
partnership. The difference between an ordinary form of partnership and the extraordinary partnership
is that, in the case of the extraordinary partnership, there are one or more partners who are regarded
as sleeping partners i.e. they are not held out publicly to be partners. As long as they are not held out
publicly to be partners, they cannot be sued for the debts of the partnership. The creditors therefore
have no recourse against them; they are not jointly and severally liable for the debts of the partnership.
The difference between the en commendite partnership and the anonymous partnership turns
on the extent to which the ‘sleeping’ partner(s) is liable to the ordinary partners for what the latter
have had to pay to creditors. In the anonymous partnership, a sleeping partner’s liability is not limited.
The ordinary partners will pay creditors and then claim from the sleeping partner his or her pro rata
share for what was paid. In the case of the en commendite partnership, the sleeping partner’s liability to
his other partners is capped to what he or she contributed to the partnership.
In the case of an extraordinary partnership, the insolvency of the partnership does not affect
the personal estate of the ‘sleeping partner.’

(h) Advantages and disadvantages of a partnership

Advantages:

• There are very few formal requirements: registration is not necessary. There is no requirement for
lodging any documents with a formal authority. All that is required is a valid partnership
agreement between the partners; and
• There is no specific statutory regulation. The common-law rules governing partnerships are fairly
easy to understand and present few legal exceptions. A partnership can operate for years without
attracting any common-law obligations.

Disadvantages:

• Partners are personally liable for the debts of the partnership;

• There is no perpetual succession; and
• A partnership is limited to twenty partners, except in the case of certain professional partnerships.

F. SOLE PROPRIETORSHIPS
A sole proprietorship is a business entity whereby a natural person runs a business for her own account.
There is no separate entity, and the rights and obligations flowing from the business are those
of the sole proprietor. The sole proprietor earns profits and incurs losses. Profits and losses are shared
with no one else. Of course, a sole proprietor can employ other people to assist with the running of the
business. However, such persons are simply employees.
When the sole proprietor ceases to carry on business, the business comes to an end. If the
business or the assets are sold, the business comes to an end. This is so even if the new owner uses the
original name of the business.
If the business goes insolvent, the sole proprietor goes insolvent and vice versa.
The advantages of a sole proprietorship are:
• It is created and runs with no formal requirements;

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• It is not subject to specific statutory regulation; and

• It is very flexible, with the sole proprietor being able to make changes without having to seek the
consent of anyone else.
The disadvantages are:
• The sole proprietor is personally liable for the debts of the business;
• There is no perpetual succession; and
• The capital of the business is limited to the funds that the sole proprietor brings into the business
or what he can muster by way of loans etc.

G. CONCLUSION
The aforementioned represent the five business vehicles used in South Africa. Any person or persons
wishing to start a business will have to decide what form their business will take. This of course
depends on the nature of the business, the objects of the business enterprise, the number of people
who are willing to be jointly involved in the control and management of the business, and the amount
of capital poured into the business, etc. Most businesses start small and as time passes progress to
something more sophisticated. Fortunately, our law makes provision for this. Today’s sole
proprietorship can be converted into a business trust next week, or a company next month and then
revert back to its original form or any other form, provided, of course, that everything is done within
the letter of the law.

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GLOSSARY OF TERMS
actus reus: guilty act
bona fide: in good faith fiduciary: one, such as an agent of a principal or
caveat subscriptor: let the signatory beware a company director, in a special relationship
cession: transfer of personal rights or claims of trust, confidence or responsibility in
collateral: indirect descendant, i.e. a descendant certain obligations to others
sharing a common ancestor, but not a lineal juristic person: legal entity, with certain legal
(direct) descendant rights, through which the law allows one, or a
consensus ad idem: meeting of the minds, i.e. group of natural persons, to act
being in agreement
de facto: in practice, but not necessarily nominal: in the name of
ordained by law obiter dictum: non-binding judicial observation
de jure: in law on a legal issue
devolve: transfer upon ostensible authority: apparent (not actual)
doctrine of precedent: regulates the general authority
duty of judges to follow the legal rulings of precedent: legal case establishing a principle or
previous judicial decisions in a manner that rule
turns such decision into a binding source of prima facie: on the face of it
law pro non scripto: as not written
ex post facto: after the fact quorum: minimum number of members of a
exceptio doli generalis: Roman law defence, deliberative body necessary to conduct the
used to ameliorate instances of contractual business of that group
unfairness ratio decidendi: finding of law producing a
exceptio non adimpleti contractus: defence for general legal rule that the court applies to the
a defendant sued on a reciprocal contract by facts of the case
a plaintiff who himself has not yet tendered restitutio in integrum: restoration to original
performance. Only available if both parties position
must perform simultaneously, or the plaintiff void: deemed never to have come into
must perform first. existence
voidable: if a contract is voidable, the innocent
party has an election to cancel or uphold it

©Actuarial Society of South Africa, 2022.