Formation of a Valid Contract

Contractual Capacity
2/ The Formation of a Valid Contract
What you need in order to have a valid contract that is binding in law

In order for a contract to be valid and binding in law, certain requirements have to
be met. All the requirements must be met, if one is missing then there will
normally not be a valid contract and the courts will refuse to enforce it.

1. The parties must have a serious intention to contract; Referred to as

2. The parties must communicate their intention to each other; ‘offer and
acceptance’
3. The parties must have contractual capacity;
4. The parties must be of the same mind;
5. The agreement must be lawful;
6. Performance of the contractual obligations must be possible;
7. The agreement must comply with any formalities;
8. The agreement must be certain in its terms
3/ The Formation of a Valid Contract
Fundamentals

Terms to Know:
The distinction between void and voidable contracts is crucial!

• A void contract is one that is considered invalid from the outset and has no legal
effect.
• It cannot be enforced by either party.
• It is like it ‘never existed’.

• A voidable contract is initially valid and enforceable but may be rendered void at
the option of one of the parties.
• Common factors:
• Misrepresentation, duress, or undue influence.
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Fundamentals
5/ The Formation of a Valid Contract
Contractual Capacity

General Rule:
The general rule is that every legal person has full contractual capacity, in other words,
you can enter into any legal and binding contracts that you want, without assistance
or limitation.

There are four key exceptions where individuals have limited contractual capacity:

1. Married Persons;
2. Minors;
3. Insolvents; and
4. Mentally Ill and Intoxicated Persons.
6/ The Formation of a Valid Contract
Contractual Capacity

Terms to Know:
• Alienate: sell, mortgage, lease-out (as lessor/landlord), give away
• Cede: a manner of alienating/transferring the rights of intangible assets (i.e. such
as the rights and benefit under a contract)
• Mortgage: you borrow money to purchase immovable property (i.e. a house) and
as security for that loan, you mortgage the property.
• Pledge: give something as security for a loan with the intention that the thing will
be given back.
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Married Persons
8/
The Formation of a Valid Contract
Contractual Capacity

Distinguish:
- Marriages In Community of Property (ICOP); and
- Formal Consent;
- Written Consent;
- Informal Consent; and
- Transactions Without Consent

- Marriages Out Of Community of Property (OCOP)

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Marriages IN Community of Property

10 / Marriages In Community of Property

Formal Consent:

- Formal consent is a written and signed consent witnessed by two witnesses.

- In terms of the Matrimonial Property Act (MPA), formal consent is required for the
following:

i. To alienate or mortgage immovable property (immovable property is property

such as land, a house, a flat or a farm).
ii. To enter into a transaction as a credit receiver under a credit agreement in terms
of the National Credit Act 2005;
- Store Cards;
- Credit Cards (through a bank/other financial institution)
iii. Bind him/herself as a surety
11 / Marriages In Community of Property

Written Consent:

i. Alienate, cede or pledge any shares, insurance policies, fixed deposits, or any
investments in a financial institution. (financial investment assets)
- But don’t need consent to sell shares listed on JSE or to deal with a deposit in
one’s own name at a bank
- Don’t need consent if the act is done in connection with the spouse’s trade,
business or occupation.

ii. Alienate or pledge jewellery, coins, paintings etc. (capital assets)

iii. Withdraw money held in the name of the other spouse at bank, building society or
post office
12 / Marriages In Community of Property

Informal Consent:
Informal consent is verbal consent.

i. Alienating or pledging household furniture and effects;

ii. Receiving money due to the other spouse from:

-their trade, business or occupation e.g. salary or pension
-inheritance, donation , bursary or prize

iii. Large donations from joint estate

REMEMBER:
If the act has not been listed in any of the categories above, then no consent is
needed.
13 / Marriages In Community of Property

Transactions Made Without Consent:

General Rule:
If a spouse enters into a contract without the required consent, the contract is null
and void.

Exceptions:
- If the third party (other party to contract )does not know or could not reasonably
have known that the required consent had not been given, then the contract is
valid.
- If the contracting spouse knew that he or she would not get consent and the estate
has suffered a loss, then an adjustment will be made in favour of the other spouse
upon dissolution of the marriage.
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Marriages OUT of Community of Property

 Marriages Out Of Community of Property (incl.
15 / Accrual)

General Rule:

Each party has unrestricted contractual capacity with regard to their own estate (i.e.
their own assets). So they do not need the consent of their spouse to do anything
with those assets.

Neither party has any contractual capacity with regard to the other party’s estate.

Exception: Household Necessaries

- They are jointly liable for debts incurred by each of them in respect of household
necessaries
- Factual enquiry
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Minors
17 / Minors
General

General:

• Who?
- A minor is an unmarried person below the age of 18 (which is the age of majority/ adulthood).
18 / Minors
General

General:

• Guardianship/Parental Responsibility
- Guardianship (parental responsibility) means the control over and the administration of the
estate (assets) of a minor, as well as assistance in performance of legal acts, such as
contracting.
- Different from custody
- Consent Required for 5-Categories:
1. The marriage of the minor child;
2. Giving up child for adoption (i.e. these people are married and want to give up their child
for adoption, so obviously the consent of both parents is required for that);
3. The removal of the child from South Africa;
4. Application for the South African passport of the child
5. Alienation of immovable property belonging to the child (i.e. selling, leasing out,
mortgaging).
19 / Minors
Effect of an Assisted Contract

• Assistance
- It can mean that the guardian enters into the contract on behalf of the minor (e.g. the
guardian signs the contract, if it is written), or the minor enters into the contract with
the consent of the guardian (e.g. the minor signs with her guardian’s consent)
- The guardian must consent to the contract before or at the time that the agreement is
entered into.
- Effect:
- The effect of a duly assisted contract is that the minor is bound and liable in terms
of the contract not the guardian.
- Exception:
- Contracts that are inherently prejudicial to the minor.
- Contract is valid, but can be cancelled.
20 / Minors
Unassisted Contracts (’limping contract’)

Unassisted Contracts: Common Law

• The contract is a “limping contract”.

The minor can choose (with the assistance of the guardian) whether to enforce the
contract (ratification) or not to enforce the contract (repudiation)

- Repudiation: minor not bound under law of contract and neither is other
party (adult)
- Ratification: both minor and the other party (adult) are bound by the contract

• The choice lies solely with the minor (guardian) . Other party (the adult) is bound
by that decision.
21 / Minors
Unassisted Contracts

Unassisted Contracts: Consumer Protection Act 2008

• Does the Act apply?

• The CPA says that the effect of a minor’s unassisted contract where the Act applies
is that it is voidable.
• This is different from a limping contract and a void contract –will look at these
voidable contracts in more detail in another section

- A contract that is voidable allows the unassisted minor to cancel the contract
(get out of it) with the assistance of the guardian and get back what they put into
the contract.
22 / Minors
Fraudulent Minor (typically Misrepresentation)

The Fraudulent Minor

- Where a minor has lied about his or her age or has lied about having the guardian’s
consent that is fraudulent misrepresentation.
- Claim does not lie in contract; but in delict!
- Delictual and not contractual damages (full consequential losses) can be
claimed.
- Must prove reasonable deception.
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Insolvents
24 / Insolvents

Insolvents

- Term to know: ‘Sequestrated’

- Apply: Insolvency Act

1. Insolvent may not enter into a contract in terms of which he disposes of assets in the
insolvent estate.
2. Insolvent may not, without the written consent of the trustee, enter into contract
which adversely affects the estate.
3. Insolvent may not, without the trustee’s consent be involved in a business which is a
general dealer or manufacturer.

- Contracts in contravention of the above are voidable at instance of trustee (not void):
- The contract is valid until the trustee chooses to cancel it and he may or may not choose
to do so depending on what is in the best interests of the creditors.
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Mentally Ill and Intoxicated Persons

26 / Mentally Ill and Intoxicated Persons

General Principle:
All people are presumed to be sane unless they have been declared mentally ill by the High Court.
- Impact: burden of proof

• Mental Illness
- High Court declaration?
- Lucidum intervallum = sane interval (lucid intervals)
- Caution: factual enquiry; difficult to prove.

• Intoxication
- The mere fact that somebody is more easily persuadable or willing when slightly intoxicated
will not make the contract void.
- The person must be drunk to the point that he does not know what he is doing (incl.
absolutely stoned, grilled, chuffed, thundered, vrot, smashed, pixelated,…) in order to get out
of the contract.