If you are an adult, you have more than likely entered into a contract at some time in your life. Contracts are not just enacted between companies for major transactions. If you rent your home, your lease is a contract. If you own your own home, you signed a contract to buy it. If you have a cell phone (other than pay-as-you-go), or internet in your home, you have a contract. If you have a job, you (should) have an employment contract. In these examples you probably did not draft the contract yourself. Lease agreements are usually drawn up by the property owner or their agent. Contracts concerning home purchase are handled by the conveyancing attorneys. Employment contracts are provided by the employer. But there may come a time when you need to draft a contract for a service provider to your business, or you need to review a contract you have been asked to sign. What are the key considerations you need to bear in mind to ensure effective contracts?
What is a contract?
A contract is a formal name for an agreement between two or more parties that creates a legal obligation on the parties. It is, in effect, a legally binding promise. If you make a promise to a friend and you fail to keep your promise, you may offend your friend and they may call into question your moral fibre, but they have no legal recourse. You have not done anything unlawful in breaking your promise. A contract carries repercussions for failure to keep a “promise” you have made formally in law.
Contracts help to regulate business relationships. They define each party’s expectations and obligations. A contract is a legal framework for commercial dealings which gives each party the security of knowing the law will uphold the agreement and enforce it. In a philosophical sense, contracts help to maintain order in society. If that sounds whimsical, imagine a world in which there were no leases, and landlords could evict tenants or increase rents at will. Unscrupulous landlords would be free to exploit tenants and create havoc in the housing market. It would have an effect on social order.
Contracts create obligations. A contract obligation is mandatory in the way that a moral promise is not; it is a legal duty to perform certain activities, with a corresponding duty of performance attached to the other party or parties.
Types of contract
There are various types of contract. Most imply a “consideration” – a payment of some sort – but not all. For example, a service provider might have a non-disclosure agreement (NDA) with a client. This prohibits the provider from disclosing confidential information about the client to anyone else. No money changes hands in executing the NDA (though the service provider will probably have a separate contract detailing the commercial relationship), but the legal obligation is no less binding. What follows is a sample of the most common contracts. It is not an exhaustive list, as a contract may be drafted to cover any set of circumstances, however unusual, for instance a parental surrogacy agreement.
- Sales contract: this covers the sale and purchase of goods or assets, such as movable property, vehicles, or equipment. The contract outlines terms such as purchase price, delivery, warranty, and conditions of sale (e.g., “voetstoots”).
- Lease contract: this governs property rental, whether residential or commercial. It sets out the rights and obligations of both landlord and tenant, including amount of rent, length of tenancy, maintenance responsibilities, and lease termination conditions.
- Employment contract: this regulates the relationship between employer and employee and defines the terms and conditions of employment, including job duties, compensation, working hours, leave entitlement, and termination provisions.
- Service contract: this is an agreement between a service provider and a client. It states the nature and scope of services to be provided, the length of time, payment terms, intellectual property rights, and any specific obligations or warranties.
- Partnership agreements: this governs the relationship between partners in a partnership, including the rights and responsibilities of each partner, profit-sharing arrangements, decision-making processes, and provisions for dissolution of or withdrawal from the partnership.
- Loan agreements: this establishes the terms and conditions for lending money. It should show the loan amount, interest rates, repayment terms, and any security requirements.
- Non-disclosure agreement (NDA): as mentioned above, this protects confidential information shared between parties. It restricts the use or disclosure of information with third parties.
- Construction contract: this is used for building projects. It defines the scope of work, payment terms, timelines, quality standards, and dispute resolution mechanisms.
- Agency agreement: this is an agreement between a principal and an agent, authorising the agent to act on behalf of the principal. It states the agent’s authority, responsibilities, and any fees payable. An example of an agency agreement is the relationship between a rental agent and a property owner. The agent usually earns a percentage of the rent as commission for finding tenants, drawing up the lease, and handling the administration of the property let.
- Franchise agreement: this governs the relationship between a franchisor and a franchisee. It lays out the terms for use of the business model, intellectual property, support services, and financial arrangements.
Defining elements of a contract
What makes a contract a contract? We’ve indicated that it is a legally binding promise, but to be legally binding, it must contain certain elements.
- Offer: without an offer, there is no basis for a contract. An offer is a proposal made by one party to another, with the intention of entering into a contract.
- Acceptance: naturally, the party being made the offer must accept it. Without acceptance – the unconditional agreement to the terms of the offer – there is no contract.
- Consensus: consensus means the parties agree on the essential terms of the contract and are willing to be bound by it. They consent to the agreement.
- Consideration: this is the legal term for value exchanged between the parties, such as money, goods, services, or a promise to do or refrain from doing something.
- Certainty: this ensures the material terms of the contract are clear and unambiguous so all parties know what their rights and obligations are. For example, if you contract to buy an iPhone 14 you want to be sure you are provided with an iPhone 14 and not an older model! If the contract only states “iPhone”, there is no certainty.
- Capacity: all parties entering into a contract must have the legal capacity to do so. This refers to being of legal age to contract as well as having the legal competency to understand the nature and consequences of the contract. Someone who is comatose or suffering from dementia would not be considered legally competent to enter into a contract.
- Possibility of performance: the rights and obligations created by the contract must be possible to perform. Performance can become impossible due to circumstances (supervening impossibility). For example, you may be a house painter and you contract to paint a house by a certain date. However, persistent rain makes it impossible for you to perform your duties by the date agreed, through no fault of your own. If you are sued for breach of contract, you could claim supervening impossibility.
- Legality: the contract must have a lawful purpose and must not contravene any statutory provisions or public policy. It must comply with all applicable laws, regulations, and industry standards
- Formalities: certain industries or certain types of contracts have formalities prescribed by law or stipulated by the industry, profession, or parties, such as registration requirements. For example, certain contracts in South Africa must be in writing to be enforceable, e.g., contracts for the sale of immovable property, long-term leases, and suretyship agreements.
While these elements need to be included for a contract to be enforceable, they don’t in themselves render a contract effective (though without them the contract would be completely ineffective). There are a few additional considerations that help make a contract easy to understand for ordinary people (i.e., non-lawyers) and watertight.
- The contract should be written in clear and understandable language. Ambiguity or vagueness can lead to confusion and disputes.
- The parties involved in the contract should be clearly identified, with accurate and complete names, addresses, and contact information to avoid any misunderstanding. This is why you are always asked to provide your ID number when signing a contract.
- The purpose and scope of the contract should be clearly defined, showing what the contract aims to achieve, the specific rights and obligations of each party, and any limitations or exclusions.
- The terms and conditions should be outlined, including details such as payment terms, delivery or performance requirements, timelines, quality standards, and any specific provisions or contingencies.
- Risks and responsibilities should be clearly and fairly allocated between the parties. This may include warranties, indemnification, limitation of liability, and insurance requirements.
- The mechanism for resolving any disputes that arise should be specified. This may include provisions for negotiation, mediation, arbitration, or litigation.
- Termination and breach provisions should be included, including the rights and obligations of the parties upon termination and the consequences of breach, such as remedies, damages, or termination rights.
- If relevant, provisions should be included to protect confidential information and trade secrets, specifying the obligations of the parties in safeguarding and restricting the use of such information.
- The governing law that will apply to the contract should be specified, along with the jurisdiction where any disputes will be resolved. If all parties are in South Africa, this is unlikely to be necessary, but is important if the parties are located in different jurisdictions.
Does it have to be in writing?
In South African law, verbal contracts can be binding and enforceable, with some exceptions. We’ve discussed above that lease agreements and contracts for the sale of immovable property must be in writing. However, a written contract is generally a good idea to ensure clarity, evidence, and easier enforcement of the terms. South African law recognises the principle of “pacta sunt servanda”, which means that agreements should be honoured and upheld. This principle applies to both written and verbal contracts.
Verbal contracts may be difficult to enforce because it may be impossible to prove the terms of the agreement, although now it is possible to record conversations – with consent of course – on a cell phone, and retain the audio file as proof of agreement. But it is generally advisable to have written contracts, as they can help prevent disputes or misunderstandings.
If a dispute arises over a verbal contract, the parties may need to provide evidence as to the existence and terms of the agreement. This could be in the form of witness testimony or other supporting documentation, such as the audio file mentioned above.
For more information
As attorneys, we will protect your interests and ensure your contract contains not only the essential elements to be enforceable, but also the extra considerations that will ensure it is reasonable, fair, equitable, and easy to understand. We speak plain English and avoid legal jargon. If you need help to draft a contract or you’d like us to review a contract you are considering entering into, contact Simon on 086 099 5146 or email firstname.lastname@example.org to arrange a preliminary discussion.
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The information on this website is provided to assist the reader with a general understanding of the law. While we believe the information to be factually accurate, and have taken care in our preparation of these pages, these articles cannot and do not take individual circumstances into account and are not a substitute for personal legal advice. If you have a legal matter that concerns you, please consult a qualified attorney. Simon Dippenaar & Associates takes no responsibility for any action you may take as a result of reading the information contained herein (or the consequences thereof), in the absence of professional legal advice.