07 Oct, 2022
Back to the Basics: Contracts 101
Contracts contribute to the smooth running of business enterprise by creating relationships; they are based on consensus so as to create a win-win situation for parties. Contracts assist to prevent contractual disputes, and also to resolve them. They ensure that parties observe the law when transacting, as well as various obligations imposed on them, including deadlines. Some contracts guarantee confidentiality.
This article seeks to provide the basic tenets of contracts, their distinction from other documents that are not legally binding and their enforceability. While most business enterprises have entered in numerous contracts, it is important to have an understanding of these principles of contracts, so as to be protected in future dealings.
CONTRACTS AND THEIR ENFORCEABILITY
A contract is an agreement arising from the approval of the parties to the contract, which is legally valid, binding, and enforceable at law. A contract can be written or verbal. The challenge with verbal contracts or agreements is that their terms are susceptible to challenge, and can be reduced to a “he said she said” argument on proof thereof. Nonetheless, verbal contracts are legally valid, binding, and enforceable. Where parties enter into written contracts, these only become effective after being signed by all parties. Important to note however is that the law mandates that certain transactions be reduced to writing, such as contracts involving the sale of immovable property, failing which, they are not valid.
A contract can be distinguished from a letter of intent, which is a commitment that parties enter into before they formalise a contract. A contract can also be distinguished from a memorandum of understanding, which simply outlines the common objectives of the parties, but is not legally binding. A contract creates binding obligations on parties to the contract, which are legally enforceable, even through litigation.
CONSENSUS IN CONTRACTS
By its name, a contract is evidence to an agreement between the parties to it: there must be consensus or a meeting of the minds. This concept is known as consensus ad idem. In some instances, ascertaining the state of mind of parties to a contract may be challenging, thus giving credence to the doctrine of quasi-mutual assent. This doctrine speaks to the conduct or actions of the parties, stating that where this is synonymous with the acceptance of the terms of the contract, the party is taken to have accepted the contract.
Next, in support of the doctrine of quasi-mutual assent, there is need to ascertain whether there has been an offer and an acceptance. Offer and acceptance can be also be inferred from conduct, not merely words or in writing. An example to illustrate this is a disclaimer notice board erected at the parking lot of a public place, like a restaurant or a shopping mall. On a daily basis, people enter into tacit agreements based on these disclaimers, by utilising the facilities offered in the public places. If the disclaimer provides that the shopping mall will not be held liable for theft or damage of a person’s vehicle while it is parked, then if the customer’s vehicle is broken into or stolen, the shopping mall is indeed not liable for any loss suffered. By using the parking, a customer is taken to have tacitly agreed to the terms and conditions of that place that are displayed as the disclaimer.
PERFORMANCE OF CONTRACTS
In addition to determining the consensus between the parties, it is a requirement that the subject matter of the contract must be possible to perform. If performance is impossible, the contract is void from inception.
A number of factors come into play when determining impossibility. The first is absolute impossibility, in which the impossibility to perform the contract is absolute and opposed to probable. Next, is that the impossibility to perform the contract must be absolute as opposed to relative. If a party undertakes to perform something which can be done in general but which the party cannot perform, then performance is not impossible. Next, the impossibility must not be the fault of either party. A party who causes the impossibility will be liable on the contract. Finally, impossibility must give way to the contrary common intention of the parties. This can be the case say when a party enters a contract under false representation. Such party will be liable on the contract.
Other instances of contracts that cannot be performed are those whose terms are vague regarding the actual conclusion of the contract, or where there is unlimited option reserved to a party, or where the language used in the contract is uncertain, such contracts are unenforceable at law due to inability to perform.
SIGNING OF WRITTEN CONTRACTS
A contract is not valid unless it is signed by the parties to a contract or their agents acting under their written authority. A signature on a contract demonstrates that a party has read, understood and consents to the terms and conditions in the contract. However, a party who has signed a contract is bound by its signature, regardless of whether they have actually read the contract or not. This principle is known as the caveat subscriptor doctrine. Interestingly, there have been instances when the courts have taken exception to this principle, such as where a party to a contract has signed a contract under misrepresentation, fraud, illegality, duress, undue influence and mistake. Placing initials on each page of a contract provides evidentiary support, however the absence of initials does not invalidate the contract.
CAPACITY AND AUTHORITY TO ENTER INTO CONTRACTS
Other essential aspects of a contract include a proper description of the parties. It must be clear who the parties to the contract are. Only parties with legal capacity or sufficient authority may enter into a contract. For individuals, parties to a contract must be above the legal age of majority, and must have the mental capacity to enter into a contract. Persons who are minors, or who are mentally incapacitated, or people who have been declared as insolvent, or who are intoxicated do not have capacity to enter into contracts. For legal persons, this capacity and authority is demonstrated by authorisations such as board resolutions or approval by the requisite regulatory bodies. Should a contract be entered into by persons who lack capacity, such contract is voidable. This means that the contract can be later ratified so as to make it valid.
A contract must be lawful and should not contravene the law. Examples of illegal contracts are agreements to sell illegal drugs or agreements to steal. While such contracts may meet all the other principles for a valid contract, they are void, unenforceable, and of no effect, because they involve committing a crime. The parties to such contracts may not seek their enforcement through the courts. To quote the famous words of a judge: “If an act is void, then it is in law a nullity. It is not only bad, but incurably bad. There is no need for an order of the court to set it aside. It is automatically null and void without more ado, though it is sometimes convenient to have the court declare it to be so. And every proceeding which is founded on it is also bad and incurably bad. You cannot put something on nothing and expect it to stay there. It will collapse.”
There are, however, instances where a contract contains provisions that can be removed to leave the rest of the contract in place, a cure known as severability can be applied.
To sum it up: a contract that can be enforced at law is one that is legal, entered into by parties with legal capacity, contains an offer and acceptance, there consideration for each party, contains certainty in its terms and conditions and signed by the parties. Such a contract can be enforced through the courts.
SANCTITY OF CONTRACTS
The principle of the sanctity of contract provides that once a contract is entered into freely and voluntarily, it becomes sacrosanct and courts should enforce it. Generally, the law respects contracts that are lawful. When parties to a contract have given their consent to it, the law guarantees the enforceability of the contract. The courts protect the will of the parties and ensure that parties uphold their obligations set out in contracts.
To ensure enforceability of contracts, it is important to consider the salient aspects of a contract to guarantee fulfilment of obligations by parties. These aspects are ensuring that there is consensus between the parties, performance is not impossible, the contract is signed by the parties, parties to the contract are properly described, they have legal capacity and that the contract is legal.