The subject matter of a contract is contained in the terms of an agreement. These terms define and qualify the obligations a contract creates.
Obligations
An obligation is a legal bond between two or more persons and comprises both a right and a duty:
The debtor bears a duty to make the performance agreed upon.
The creditor has a right to claim that performance.
All contracts give rise to personal rights and duties, so that a right that arises from a contractual obligation is enforceable only against the other party to that obligation.
Classifications
Obligations may be classified in various ways:
Civil, natural and moral obligations
A moral obligation, such as the duty to fulfill a promise to join a friend at the nets on Friday for cricket practice, is not regarded as a legal obligation; it has no legal significance at all. The duty derives merely from a social agreement, or from the dictates of one’s conscience.
A civil obligation, most common in contracts, is a legal obligation enforceable by a right of action, so that, if the obligation is not fulfilled, the creditor may sue the debtor for breach.
A natural obligation, relatively unusual, may not be enforced in a court of law, but it is not without legal significance:
If a person performs in terms of a natural obligation, he may not later reclaim the performance on the basis that it was not owed. If performance is made, it is regarded as having been owed.
Natural obligations may be set off against civil obligations.
Natural obligations arise when, for example, a minor concludes a contract: If the other party is major or a juristic person, he is bound by a civil obligation, but the minor is bound only by a natural obligation. Another example would be a betting agreement or wager.
Reciprocal obligations
Reciprocal obligations are linked obligations, where one obligation is owed in exchange for another:
In a contract of sale, therefore, payment of the purchase price and delivery of the object of the sale are owed in exchange for each other: the purchaser therefore does not have to pay unless the seller delivers.
Another example is a contract of lease, where the obligation to pay the rent is tied in with the obligation to let the premises. Where there are two obligations, ‘there are two rights, two duties, and therefore two creditors and two debtors’.
Simple, alternative, generic or facilitative obligations
A simple obligation involves a performance that has been specified exactly by the parties in their agreement. An alternative obligation is one in which the parties agree that someone can choose a performance from two or more specified alternatives. A generic obligation is one that allows a party to choose a performance from a specified family of performances. A facilitative obligation specifies the performance owed by the debtor, but gives the debtor the right to choose to make a different specified performance.
An indivisible performance gives rise to a single obligation. A divisible performance gives rise to more than one obligation. There are as many obligations as there are indivisible performances owed in terms of a contract. A divisible contract is one that can be divided into separate contracts, each having one or more obligations.
Some categories overlap, as certain obligations fall simultaneously into several of them: ‘For example, an obligation relating to the delivery of a table lamp might be a civil, simple and reciprocal obligation, as well as entail an indivisible performance’.
Terms
The parties to a contract frequently agree upon various modifications of their implied rights and obligations. These pacts or stipulations may be agreed upon orally, or they may be embodied in a written contract in the shape of provisions of clauses. Such provisions are often loosely referred to as ‘conditions’, but they are in fact not conditions at all; they are merely ‘terms of performance’. The distinction between conditions and terms is of the utmost importance, since they differ in their legal effect.
A condition is either fulfilled or not, according to whether a prescribed event does or does not take place. If the condition is fulfilled, it has an automatic effect, either creating or cancelling a contractual obligation. The fulfilment of a condition cannot be enforced, however.
A term, on the other hand, imposes an obligation upon the party or parties concerned to make certain performance. If such party does not make the performance as prescribed by the term, he is in breach of contract, and the other party may invoke the appropriate remedies for breach. For example, suppose that Armand agrees to sell his motor car to Cameron for R100,000 subject to Ali’s approval of the car, the price to be paid in monthly instalments of R10,000 each. The provision as to Ali’s approval is a condition, while that relating to the method of payment is a term of performance.
Terms, then, are those stipulations in the contract that the parties have agreed on, and that bind them to perform. The terms of a contract set out the nature and details of the performance due by the parties under the contract: that is, the nature and description of the commodities or services to be rendered, and the manner, time and place of performance. Not all terms are necessarily in the written contract itself. Terms comprise both the stipulations that the parties include in their contract, and those provisions included by law. Contracts do not have to fall into any particular category, but certain traditional kinds are recognised, along with their own particular rules and terms and consequences.
The word term was formerly restricted to a provision relating to time: that is, a dies or time clause. The word, however, is now in general use as referring to any term of performance.
There is a distinction, then, between South African and English law, where terms and conditions are synonymous, and where they are used interchangeably. In South Africa, a condition is a very special type of contractual term, operating in a specific way; for example, ‘I will pay you R3,000 if you climb Table Mountain’.
It remains the case in South Africa, however, that the word condition is very loosely used in the drafting of contracts. In the following formulation—‘I agree to donate R50,000 on condition that…’—what we have is not a condition but a modus or modal clause.
Essentialia, naturalia and incidentalia
The primary rights and obligations flowing from a particular contract are those the parties expressly or tacitly agreed upon, and also those the law implies. This contrasts with secondary rights and obligations (such as the duty to pay damages and the duty to restore performances received prior to termination), which arise after a breach of contract. It is not necessary for the parties to agree upon any special rights or obligations other than those essential to their particular contracts (essentialia); all obligations concerning the manner, time or place of performance are regulated and are implied by law as soon as the parties have made their contract (naturalia). For example, if Sa Roj has agreed to sell her motor car to Bosie for R100,000, all the rights and obligations of both of them are regulated by the law. Sa Roj becomes subject to an obligation to deliver the car to Bosie at Bosie’s request, and Bosie is obliged to pay Sa Roj the R100 000 the moment Bosie has accepted delivery of the car.
Similar principles apply to all other types of contract. The parties may, however, agree upon some modification or variation of their implied rights and obligations, provided they are not illegal (incidentalia). For example, in the case supposed, they may agree that the sale of the car is to take place only if the car is approved of by Rodney, or they may agree that the R100,000 is payable in monthly instalments of R10,000. These modifications of the contract, it will be seen directly, constitute either ‘conditions’ or ‘terms of performance’.
According to the Roman-Dutch classification, then, terms may be classified as essentialia, naturalia or incidentalia:
Essentialia are distinctive terms used to identify or classify a contract as one of the specific types of contract recognised by law. Cash and commodities, for example, make for contracts of sale. Essentialia are of the essence in a contract, without which it cannot subsist, and for want of which there is either no contract or a contract of a different kind.
Naturalia are terms automatically included, by operation of law (ex lege), in any contract belonging to one of the classes of specific contract traditionally recognised in South Africa.[46] Naturalia are based on what is fair and reasonable between contracting parties over contracts of that kind. In a sale contract, for instance, the seller may not sell something that is defective. There are also guarantees against eviction in lease agreements. Generally speaking, the parties may exclude or vary naturalia by express agreement, in exclusion or exemption clauses (e.g. an ‘as is’ clause, known as a ‘voetstoots clause’, excluding the implied warranty against latent defects), though the courts interpret such agreements narrowly.
Incidentalia (or accidentalia) are all terms other than the essentialia and naturalia: that is, additional terms agreed upon expressly by the parties that supplement or modify the rights and duties incorporated by law into a particular contract.
Modern classification, as applied by the courts, generally favours the distinction between terms express and implied.
Express terms
Express terms are specifically and explicitly agreed upon by the parties, fixed by the actual agreement, and are either articulated in an oral contract or written down. They are the most important terms in the contract.
Signed contracts: caveat subscriptor
A person who signs a written contract is ordinarily bound by its terms in terms of the maxim caveat subscriptor: let the signatory beware.
Standard-form contracts
Express terms in standardised contracts are dealt with differently from express terms negotiated by the parties, in that a party presenting a standardised contract to another for signature is expected to draw his attention to any unexpected terms, failing which the signatory may not be bound.
Unsigned documents
Express terms may also be incorporated into a contract by reference to one or more other documents.
Ticket cases and notices
A ticket, with express legal terms.
Express terms contained on tickets and notices that are posted up in public places may also be binding, depending on whether the party denying that he is bound by the terms was aware of their existence or ought reasonably to have been aware of them in the circumstances.
Consumer Protection Act
The Consumer Protection Act provides that customers’ attention must be drawn to certain categories of clauses or notices that could be prejudicial. In respect of serious or unexpected risks, customers must indicate their assent by signature or by other positive conduct.
Terms prohibited by law/implied terms
Certain terms are prohibited by law. Terms contrary to public policy, or in conflict with a statutory prohibition are not enforced. Sometimes courts are given the power to modify objectionable terms.
Tacit contracts
Tacit contracts are inferred from the conduct of the parties and are very controversial. Some writers hold that terms expressed by the parties’ conduct may be regarded as tacit, whereas others hold that actual agreement is necessary.[citation needed] Tacit contracts also present problems as to their conceptual basis, the question being whether or not they should fall under the banner of express terms at all.
Implied terms
Implied terms are not explicitly agreed upon by the parties but nevertheless form part of the contract. They are binding on the parties without their having made any explicit agreement as to the points in question. They are effectively naturalia and usually entail legal duties, and in some cases may be varied or excluded by the parties, as in a contract of sale voetstoots. These terms derive from the common law, from trade usage or customs, and from statute. Most terms implied in law come from the common law, but there is not a closed list, because contract law is not static. A term may not be implied if it conflicts with the contract’s express terms, or if these indicate that the parties did not wish to include that term.
As Corbett AJA noted in Alfred McAlpine v Transvaal Provincial Administration, ‘In legal parlance the expression “implied term” is an ambiguous one in that it is often used, without discrimination, to denote two, possibly three, distinct concepts’. Terms may be implied, in other words:
By operation of law (ex lege)
By custom or trade usage
From the facts surrounding the agreement of the parties, or better say from the unarticulated intentions of the parties (ex consensu)
For present purposes, it suffices to focus on the first and the last of these—the second is usually merged into the first—and on the ambiguity between them.
Terms implied ex lege
A term implied in law (a naturale) is one that the law, in the absence of agreement to the contrary by the parties, and in some cases compulsorily, attaches to the particular class of contract. Many of the terms of performance or obligations of the parties in contracts such as sale, letting and hiring, or agency, are implied in law. For example, suppose that the owner of a grandstand lets a seat on it to a spectator for a certain day. The former is under an obligation to keep the stand in a proper state of repair, a term to that effect being implied in law in all contracts of letting and hiring of property.
Terms implied ex lege, or in law, may derive from the common law (as developed by the courts), from trade usage or custom, or from statute. (In the case of the common law, they have already been discussed in the section dealing with naturalia.) Terms implied ex lege may be varied or excluded expressly by the parties.
A custom is a particular rule that has existed, either actually or presumptively, from time immemorial in a particular locality, where it has obtained the force of law despite conflicting with or not being found in the general law of the land.
A term can be implied on the basis of trade usage, but such an implication is made not in law, strictly speaking, but on the basis of the parties’ presumed intentions. Trade usages do not apply to a particular space; they develop in a particular profession or trade. In the case of Golden Cape Fruits v Fotoplate, Corbett JA established the requirements. The trade usage must be:
Uniformly and universally observed
Long established
Reasonable, so that one would expect people in the trade to be aware of it
Notorious
Certain
Not in conflict with positive law
Not conflict with an express term of the contract
In Coutts v Jacobs, for instance, Jacobs consigned goods to Coutts, who sold them and charged commission, which Jacobs refused to pay. The judgment went against him, the court finding that there was a trade usage whereby wool sales agents were entitled to charge commission.
Tacit terms
A term implied in fact is generally referred to as a tacit term. A tacit term is a wordless understanding between contracting parties. These are terms the parties must have had in mind but did not expressly articulate because they are so obvious. A tacit term is implied where the contract is silent on the point, but where it is clear that the parties intended to include the term, and they would not have contracted other than on the basis of that term. A tacit term, accordingly, has the same legal effect as an express term. It is derived from the common intention of the parties, and is in this way an exception to the parol evidence rule.
The common intention of the parties in such a case is inferred by the court from the express terms of the contract and the surrounding circumstances, including the subsequent conduct of the parties. Suppose, in the example given above, that the spectator hired the seat for the purpose of seeing a certain ceremony that both parties contemplated would take place on that day, but that no express reference to the ceremony was made by the parties in contracting. A term is implied from the circumstances that the hiring is conditional on the ceremony taking place on the day in question.
The courts often deploy the officious-bystander test to determine whether or not a contract contains a tacit term, imagining that an impartial bystander had been present at the conclusion of the contract and had asked what might happen in a situation the parties had not expressly foreseen: If the answer is self-evident to the parties, the term is taken to be incorporated as a tacit term. If, therefore, the parties are engaged in a particular trade and know that there is a trade usage governing their transaction, they are taken to have tacitly incorporated it into their contract.
There being a presumption that parties in entering into an agreement have given expression to all the terms by which they intend to be bound, the courts are slow to find that an implied term affects their reciprocal obligations and will never do so if the effect of the implication would be to prejudice the rights of third parties. A term will not be implied merely because it is reasonable to do so; the courts will not make a contract for the parties. The implication must be necessary in the business sense to give efficacy to the contract. It is not necessary, however, that the parties should have consciously envisaged the situation. It is sufficient that their common intention was such that a reference to such a possible situation by a hypothetical ‘officious bystander’ would have evoked from them a prompt and unanimous assertion of the implied term. A term sought to be implied in a contract must be capable of clear and exact formulation. The party claiming the existence of a tacit term must formulate it clearly and precisely.
Whether or not a term is implied depends upon the facts of each particular case. One general question concerns the effect of a contract’s being reduced to writing. An entire agreement clause in a contract has been said not to preclude the existence of a tacit term; it seems this also holds good when a statute requires the terms of the contract to be in writing. Another question related to the standard of proof that must be satisfied. The Appellate Division left this unanswered, after noting that there are two lines of authority when it comes to the proof of tacit contracts. Although none of them purports to resolve the issue, more judicial pronouncements follow the more stringent test that there must be no other reasonable interpretation than that the parties intended to, and did in fact, contract on the terms alleged than follow the less demanding ‘most plausible probable conclusion’ test.
Kerr’s classification
In addition to essentialia, naturalia and incidentalia, on the one hand, and implied and express terms, on the other, Prof. AJ Kerr of Rhodes University offers another popular classification of contractual terms. He divides them more narrowly:
Invariable terms are those that cannot be altered; no contract can exist without them. There are two types:
Essentials
Terms imposed by statute
Express terms are those expressed by the parties.
Implied terms are implied between the parties. They are imposed on the contract by implication.
Residual terms (ex lege) are implied by law. They apply to a contract in the absence of invariable, express or implied terms, and exist outside of the agreement.
Material terms
To determine the nature of the relief one party can claim on a breach of a term by the other, the terms of a contract are sometimes distinguished as either ‘material’ or ‘non-material’. Generally, in the absence of a clause that provides for cancellation (a lex commissoria), rescission of a contract is permissible only if the breach in question is regarded as a material breach, which is usually the case if it relates to a material (or essential or vital term)—that is, one that goes to the root of the contract. Material terms are those vital to the performance of obligations. The breach of a material term entitles the innocent party to cancel the contract. Breach of a non-material term gives rise to a claim for damages only.
A good deal of confusion has been caused in South African law by the expression warranty, which has a variety of technical meanings in English law. In South Africa, the word warranty is non-technical and simply means ‘term’. Unfortunately, the use of the words condition and warranty in the English-law sense is relatively common in South Africa. This causes difficulties in the construction of documents.
The distinction between material and non-material terms applies to terms, whether they are created expressly or implied.
Conditions
A condition in South Africa is a term that qualifies a contractual obligation so as to make its operation and consequences dependent on the occurrence of some uncertain future event. The event must be not only future but also uncertain—something that may or may not take place. The fate of the obligation depends on whether the event takes place or not.
Conditions are usually classified in three ways, by:
The effect of the fulfilment of the condition on the obligation (whether, that is, it creates or discharges the obligation)
The nature of the event attached to the condition
with whom lies the power to fulfill the condition
The first of these is the most important. Its effect can be either suspensive or resolutive, or both.
Effect of fulfilment
This is the most common form of conditional classification.
If the parties agree that the performance of obligations under the contract is not enforceable until a certain condition is fulfilled, that condition is a suspensive one. As Van den Heever J noted, however, in Odendaalsrust Municipality v New Nigel Estate Gold Mining, ‘The contract (in the modern sense, now that all contracts are consensual) is binding immediately upon its conclusion; what may be suspended by a condition is the resultant obligation or its exigible content’.[54] In other words, the contract comes into being when the agreement is entered into, but the requirement of performance kicks in only if and when the condition is satisfied. In the example of a father who promises his daughter that he will buy a car for her if she passes her examinations, the contract forms when these terms are agreed to, but the father’s obligation to buy the car sets in only if his daughter passes her examinations. Usually a suspensive condition must be fulfilled within a reasonable period of time, though sometimes the parties attach a period of time to the condition. A suspensive condition (or condition precedent), therefore, is one that suspends the operation of the obligation until the condition is fulfilled.
Pending the fulfilment of the suspensive condition, the parties are clearly in a contractual relationship from which neither may unilaterally resile. Although the operation of the contract is suspended, it gives rise not merely to a spes debiti but to contingent rights and duties that are recognised by law. For example, those rights may be protected by interdict, are capable of cession, and are transmissible on death. Until the condition is fulfilled, however, the obligation is neither enforceable nor capable of being performed. The better view is that the nature of the contract is unaffected by the condition. In the example given above, the contract is not innominate prior to fulfilment of the condition; it is simply a conditional sale.
Upon the fulfilment of the condition, however, the contract becomes absolute, and it has a retroactive effect. It dates back to the moment when the agreement was made, which is then regarded as having been unconditional from the outset. A suspensive condition must be fulfilled in its entirety, unless the parties intended that fulfilment of part of the condition should entail performance of part of the promise.
If the condition is not fulfilled, the obligation is treated as void ab initio, unless the condition is for the sole benefit of a party who waives the benefit of the condition within the time stipulated for fulfilment, by proper notification to the other party. Where no time is stipulated, the obligation is discharged if a condition, of a type that is not for the specific benefit of one party only, remains unfulfilled after the lapse of a reasonable time.
Another example of a suspensive condition is a sale of a thing subject to the thing’s being approved of by a third person.
A suspensive condition should not be confused with a term or stipulation relating to time of performance. In the case of a suspensive condition, the operation of the obligation flowing from the contract is suspended, in whole or in part, pending the occurrence or non-occurrence of a particular specified event. A term of the contract, on the other hand, imposes a contractual obligation on a party to act, or to refrain from acting, in a particular manner. A contractual obligation flowing from a term of the contract can be enforced, but no action lies to compel the performance of a condition. It follows that a provision as to time of performance is simply a term of the contract: for example, where a company on a certain date declares a dividend ‘payable to all shareholders registered’ on a certain later date the right to the dividend vests in the shareholders on the date of the declaration, but the dividend is claimable only on the later date.
The nature of the contract may affect the rights of the parties when there is a suspensive condition. It has been held that, where an agreement of purchase and sale has been entered into subject to a suspensive condition, no contract of sale is then and there established; it develops into one of sale only on fulfilment of the condition.
This statement of the law, or what has been described as the Corondimas principle, has been much criticised, even though it has consistently been applied in subsequent cases. Although it was applied again, on the grounds of precedent, by the Appellate Division in Tuckers Land and Development v Strydom, its correctness was questioned and criticised, obiter by Van Heerden JA, and directly by Joubert JA. The latter, reviewing the old authorities, showed that the principle was not in accordance with Roman and Roman-Dutch law. ‘It would seem, however’, wrote Tebbutt J in ABSA v Sweet, ‘that in a contract of lease no such considerations apply and a contractual relationship comes into existence between the lessor and the lessee on the signing of the lease although the resultant obligations arising from the lease may be suspended’. It is apparently also now accepted, when a suspensive condition is fulfilled, that the contract and the parties’ mutual rights ‘relate back to, and are deemed to have been in force from, the date of the agreement and not from the date of the fulfilment of the condition, i.e. ex tunc’.
On the other hand, if the parties agree that the obligations under a contract should operate in full, but comes to an end if an uncertain future event either does or does not happen, they are said to have agreed to a resolutive condition (or condition subsequent). The continued existence of the contract depends on the event happening or not happening, as the case may be: for example, “I shall buy and give you a car on the condition that, if you fail your exams, I will take the car back.” Another example would be a contract of sale whereby one sells a car on the condition that, if the buyer fails to pay the price by a certain date, it will be repossessed.
A resolutive condition, then, is one that discharges an existing obligation the moment the condition is fulfilled. Prior to the fulfilment of the condition attached to the contract, the contract has full legal effect, and either party may claim performance by the other of his obligations. Upon the fulfilment of the condition, the contract is terminated and is regarded as if it had never existed. The consequence is that each party may claim to be restored to his original position. For example, if Jess fails her exams, she must restore the car to Rodney.
Nature of the event
A positive condition depends on the occurrence of an uncertain future event: ‘If Richman marries Anjanette’, for example. A positive condition is fulfilled if and when the event contemplated by the parties takes place. It is fair to say that the preponderance of suspensive conditions is positive.
A negative condition depends on an uncertain future event’s not happening. When it becomes clear that an event can no longer take place, the condition is satisfied and the agreement works on that basis. Negative conditions are generally resolutive.
Who has the power of fulfilment
Conditions may also be potestative, casual or mixed, depending on whether the operation of the obligation is dependent on the creditor’s actions or on events beyond the control of the parties.
A causal condition depends for its fulfilment on some third party or outside agency or event, like chance, and not upon the action of either party: ‘If Armand attains the age of twenty-five’, for example, or ‘If Armand has children’. The classic example is a contract of insurance, whereby the insurer makes a promise of reimbursement in the case of loss (as, for example, by flood or fire).
A potestative condition depends for its fulfilment on one of the contracting parties; it is entirely in the power of one of the parties. An example would be where Zola agreed to give her neighbour, Jaylynne, a sum of money if Jaylynne would cut down a tree that obstructed her view. If Jaylynne undertakes to cut down the tree in return for the money, the agreement is not conditional: Jaylynne is bound to perform her side of the bargain. A pure potestative condition si volam, which reserves to the promisor an unlimited choice as to whether to perform or not—‘I shall give you R100 if I so wish’—clearly gives rise to no obligation whatsoever, but the position is otherwise if fulfilment depends on the will of the promisee (where, for example, Andrew gives Bianca an option to buy his farm). A potestative condition may be negative, as where Andrew makes a gift to Bianca on condition that Bianca refrains from doing something. A promise subject to a negative potestative condition is exigible only at the death of the promisee, for only then is the condition fulfilled.
A mixed condition is one composed of both elements: casual and potestative: for example, ‘If Francois (one of the contracting parties) marries Cindi (some third person)’, or ‘if the children continue to reside with their mother (the beneficiary)’. A mixed condition depends for its fulfilment on both or one of the parties to the contract, as well as a third party or chance event. It is a mixture of the potestative and the causal. As an example, quite common in wills, one may make an obligation under a contract subject to the condition that the other party marry someone.
The condition attached to the obligation must be possible.
Fictional fulfilment
Even if, in the case of a positive condition, the contemplated event does not take place, there may be what is called ‘fictional fulfilment’ of the condition. A contracting party must not obstruct the fulfilment of a condition. If the party who would be bound by the condition being fulfilled deliberately prevents its fulfilment to escape the obligation, the condition is deemed to have been fulfilled—with the consequence that the obligation becomes absolute. A legal fiction comes into effect. MacDuff v JCI is the leading case in this area.
Although negligent prevention of fulfilment does not trigger this principle, there may be a duty on a party to take active steps to bring about fulfilment of the condition, either because the contract stipulates such a duty or because omission of such steps would render fulfilment impossible. In such a case neglect to take the steps would bring about fictional fulfilment. For example, if Perry agrees to buy Robert’s house, subject to his obtaining a loan from a bank or building society by a certain date, and Perry makes no effort to obtain the loan because of a sudden slump in the property market, the condition is considered fulfilled, and Perry is bound to the contract of sale. The operation of this principle is subject to the interests of third parties.
The above refers to suspensive conditions. It is generally thought that the principle of fictional fulfilment can be extended to the fictional non-fulfilment of a resolutive condition although there is no Roman-Dutch authority precisely in point.
Time clauses
A time clause (dies) is a contractual term that makes the existence of an obligation dependent on an event or time that is certain to arise in the future. Such clauses may be either suspensive or resolutive:
An example of a suspensive time clause would be one that permits a car buyer to take the purchased vehicle now, but only commence payment in three weeks. In other words, the agreement suspends the date of payment until a certain date in the future.
A resolutive time clause stipulates the duration of the contract, after which it ceases. Although it comes into existence and is performed right away, it will, at a certain future point, be resolved and the obligation terminated. Lease contracts and fixed period contracts of employment are common examples.
Other common contractual terms
Other significant contractual terms include suppositions, modal clauses, exemption clauses and non-variation clauses.
Assumptions and suppositions
The effect of a contract or obligation is often made contingent on the truth of an assumption the parties have made about a past or present fact. If Johann and Piet, for example, are negotiating a contract to buy and sell a painting, Johann may stipulate that he will make the purchase only if the painting is an original Rembrandt. They call in an expert. If their supposition is confirmed, the contract proceeds, if not, the contract falls away. Similarly, Fourie v CDMO Homes involved a sale of land, adjacent to a river, by CDMO to Fourie, whose offer had been subject to the following condition: that there were pump rights to the river. Although the parties were unsure that this was so, they concluded their agreement on the supposition that pump rights existed.
Modal clauses
A modus is a term wherewith one party qualifies the other party’s right to performance in some way. Usually it involves the condition that the other party use or refrain from using the performance in a particular way. Failure to comply with a modal clause constitutes a breach of contract.
Contracts of donation often have modal clauses attached to them. For example: “I will donate R100,000 bursary to Rhodes University for a Catholic male student.” If, ignoring for present purposes the constitutional limits on freedom of testation, the university should instead make that bursury available to a Muslim female, it would be in breach.
Examples of modal clauses include property contracts, restrictive covenants and negative servitudes that have to be registered. They are commonly attached to the contract.
Warranties
A warranty is a written assurance that some product or service will be provided or will meet certain specifications. The relevant contracting party assumes absolute or strict liability for performance. In Schmidt v Dwyer, it was ruled that a warranty could not be overridden by a voetstoots clause.
There are, generally speaking, three kinds of warranty:
Express warranties, to which the parties expressly agree, and include in the written contract
Implied warranties, which are determined as per the officious-bystander test
Residual warranties, which apply to contracts because of the operation of the common law, as in the case of Van der Westhuizen v Arnold, with the warranty against eviction, or in the case of the rule against selling defective goods
Exemption clauses
Exemption or exclusionary clauses are the opposite of warranties, exempting persons from liability that would ordinarily apply to them under the law, or limiting their liability. To be effective in a given instance, such a provision must, of course, form part of the contract, and also encompass the liability and circumstances at issue. The law must also permit the alleged exemption or exclusion. Whether or not an exemption or limitation forms part of a contract turns on whether or not it has been agreed to, and usually depends on the operation of the doctrine of quasi-mutual assent, which protects someone who reasonably assumes that the other party assents thereto. The assent may be indicated:
By a signature on a document (in which case the principle is traditionally expressed by the phrase caveat subscriptor)
By conduct, which is the case where the clause appears, for example, on a ticket or on a notice at the entrance to premises
The facts of a particular case may fit into both classes. Hutchison and Du Bois submit “that this classification is merely a matter of convenience and of no actual importance.” Whether the exemption or limitation forms part of any document or notice assented to depends on the interpretation of the pertinent document in accordance with the principles discussed above. In the absence of actual consent, the question is essentially whether, in light of the nature and appearance of the document in question, as well as the parties’ conduct, it was reasonable for the party relying on the clause to assume that the other party assented to the clause, or was prepared to be bound by the terms of the document, whatever they were. This depends especially on the:
Steps taken to bring the existence of the clause to the other’s attention
Sufficiency of the steps, depending on the nature of the document, the clause in question, as well as its presentation
Particular circumstances of the parties
Of course, the effectiveness of such a clause may also be nullified by the usual principles relating to misrepresentation, fraud, duress, undue influence and mistake.
Exemption clauses are commonly deployed by big business for planning, for protection from liabilities and to control variables that are otherwise uncontrolled. Although an important feature of contracts, the fact that they are used on such a large scale means that they are approached by the courts with suspicion and:
Interpreted restrictively, particularly if they are unclear
Tested against the dictates of public policy. The Constitution, as illustrated in Barkhuizen v Napier, plays an important background role here.
Restrictive interpretation
If an exemption is clear and concise, there is very little room to manoeuvre. The courts are bound by the dolus rule. The difficulty here is that most exemption clauses are vague and ambiguous. The courts’ attitude, well illustrated in Wells v SA Alumenite, is to interpret them very strictly.
If the clause is clear and unambiguous in its meaning, the courts give it that meaning. In Durban’s Water Wonderland v Botha, where the respondent and her child sustained injuries when they were thrown off a malfunctioning jet ride at an amusement park, the court found that the exemption clause clearly covered any liability based on negligence related to the ride’s design or manufacture. This approach has been confirmed by the Supreme Court of Appeal in more recent cases.
If the clause is ambiguous, the court interprets it narrowly and contra proferens. The contra proferentem principle provides the basis for determining the reach of such clauses. They are interpreted restrictively, confining them within reasonable bounds to the extent that this can be done without straining the clear meaning of a clause. This interpretation must be one to which the language is fairly susceptible; it must not be fanciful or remote. This means, for example, a provision may not be treated as an exemption clause at all, or a widely drawn clause may be interpreted as not referring to legal grounds of liability, or to cover only the minimum degree of blameworthiness for which the party would be liable, or not to deal with the circumstances of the claim, or not to protect against liability where this ‘would make a mockery of the other provisions of the contract’, in view of the obligations specifically assumed.
In this regard, the court must examine, among other things, the nature of the contract and its content, and the nature of the dealings between the parties. In Weinberg v Olivier, the owner of a garage was found to be liable for damage to a car parked there, in spite of an exemption clause in the basic bailment contract, because it did not to cover damage occurring outside the garage.
Public policy
It is now firmly settled that an exemption clause can protect against liability for a “fundamental breach” of contract. Exemption clauses often bring into issue questions of equity between big business and the common man: for example, as cited (unsuccessfully) by a patient in his claim against a hospital in Afrox Healthcare v Strydom. The fact that exemption clauses are generally held to be operative does not mean that a specific exclusionary clause cannot be declared contrary to public policy and as such unenforceable. The governing principle is that the courts will not enforce agreements judged to be contrary to public policy.
The standard applied in respect of exclusionary clauses is no different from that applicable to other contractual terms that are invalid as a result of considerations of public policy. The question is whether upholding the relevant clause or other term would conflict with the interests of the public as a result of extreme unfairness or other policy issues; in other words, whether a contractual provision, in view of its extreme unfairness or other policy considerations, conflicts with the interests of society. This has very rarely been shown to the courts’ satisfaction.
A party cannot seek to exempt himself from liability for loss or damage to the property of another caused by his own dolus or by that of his servants. To permit of such a situation would be contra bonos mores. A party cannot exempt himself from liability for the wilful misconduct, or criminal or dishonest activity (fraud, in other words), of himself or his employees or agents. In Wells v SA Alumenite, the aggrieved party had been induced into buying a lighting company based on a misrepresentation, but there was a clause exempting seller from any misrepresentation. The Appellate Division held that, “if people sign such conditions they must, in the absence of fraud, be held to them. Public policy so demands.”
Although it is clearly established a clause seeking to exclude liability for fraud is invalid, yet liability may be excluded for employees’ dishonest conduct if their employer does not profit from it, and even for a party’s own “wilful default.” A party can be exempted from liability not only for negligence but, as per Afrox, also for gross negligence. In Government of the Republic of South Africa v Fibrespinners & Weavers the Appellate Division gave effect to a clause exempting an employer from liability for theft by its employee. More recently, FNB v Rosenblum confirmed this approach. Where one exempts oneself from negligence, however, one should do so explicitly. In cases of ambiguity, the clause is interpreted not to exclude liability for negligence.
Inequality of bargaining power is not in itself a ground for nullifying exemption clauses; nor does the principle of good faith operate as an independent criterion. The Constitution provides considerable potential for cutting down the range of permissible exemption clauses, however. A clause drafted in terms that exceed the bounds of what is permissible is confined to those bounds, rather than invalidated.
Because many contractual disputes, perhaps the majority, arise out of disagreement concerning the meaning of contractual provisions, interpretation of contracts is an important area.
The law applicable to contracts
Sometimes a court is faced with a contract involving a foreign element: for example, where the contract has been made in one country, but is to be performed, wholly or partially, in some other country. The court then has to determine which legal system governs the contract. This determination is made by applying the appropriate conflict or choice-of-law rule. The law that is actually held to be applicable is known as “the proper law of the contract.”
In the South African system, the rule is that the proper or governing law of the contract depends in the first instance on the express or implied intention of the parties. If the parties have expressly agreed (usually by means of a “choice-of-law” clause) that the law of a particular country shall govern their contract, their choice normally prevails. Where there is no such express agreement, circumstances may nevertheless be present from which a tacit choice of law may be inferred (for example, where the contract deals with concepts peculiar to a particular system), but such cases are in the nature of things relatively rare.
In the absence of any such choice by the parties, express or implied, the court simply assign a governing law to the contract. Traditionally this is done on the basis of a presumed intention fictitiously imputed to the parties, but the more modern approach is for the proper law to be determined objectively, with reference to the factual links between the agreement and the various relevant legal systems. In other words, the court selects the legal system “with which the transaction has its closest and most real connection.” Usually this is the law of the country where the contract was made or signed (the lex loci contractus), or, when performance is to be tendered in another country, the law of that country (the lex loci solutionis). It has been argued that, in view of modern methods of communication and international trade, the weight of the locus celebrate contractus in assigning the governing law is diminishing. It is important to note, however, that the court is not restricted in its choice of proper law by any rigid rules, and may in appropriate cases assign to the contract some other governing law.
Normally, the contract is governed by a single proper law throughout its existence, since the rights and duties of the parties would be distorted if some were to be governed by one system of law and others by another. However, the manner of performance of the contractual obligations may differ according to the lex loci solutionis.
The proper law of the contract governs virtually all aspects of the contract, including its essential validity, nature, content, mode of performance and interpretation. By way of exception, however, the contractual capacity of the parties, together with the formalities of execution, are governed by the lex loci contractus, unless the contract concerns immovable property, in which case the law of the country where the property is situated (the lex situs or rei situae) applies. But it seems that a contract that does not comply with the formal requirements of the lex loci contractus is nonetheless formally valid if it complies as to form with the proper law of the contract.
The intention of the parties
“The primary purpose of the interpretation of a contract,” writes Catherine Maxwell, “is to give effect to the intentions of the parties.” The primary rule, therefore, is that effect must be given to the parties’ common intention: that is, to what both of them intended on entering into the contract. As Innes J put it in Joubert v Enslin, “The golden rule applicable to the interpretation of all contracts is to ascertain and to follow the intention of the parties.” If, therefore, the contract or admissible evidence gives a definite indication of the parties’ meaning, the court should effect that meaning. This essentially subjective undertaking is generally understood to be the ideal in contractual interpretation.
Where a contract has been put into writing, the language used by the parties is frequently vague or ambiguous and if a dispute arises as to what the parties meant, it becomes necessary to ascertain what in fact they did intend. In ascertaining their intention various rules or canons of construction are employed. The chief of these rules are as follows.
Ordinary meaning
In practice, however, the approach is objective. The traditional approach is a conservative one that concentrates on the language of the agreement. The intentions of the parties must be gathered from the language of the contract and not from what either of them might have had in mind. Probably this approach is best articulated in Hansen, Schrader & Co. v De Gasperi:
Now, it is not for this Court to speculate as to what the intentions of the parties were when they entered into the contract. That must be gathered from their language, and it is the duty of the Court as far as possible to give to the language used by the parties its ordinary grammatical meaning.
In determining the common intention of the parties, then, the court must consider first the literal and ordinary meaning of the words in their contract. The court in Hansen was concerned not with the parties’ intention so much as with whether their intention could clearly be apprehended in the actual document. Hence Innes J, in Joubert v Enslin: “If the contract itself, or any evidence admissible under the circumstances, affords a definite indication of the meaning of the contracting parties, then it seems to me that a court should always give effect to that meaning.” If the wording speaks with sufficient clarity, in other words, it must be taken to express the parties’ common intention. As Joubert JA put it in Coopers & Lybrand v Bryant, “the language in the document is to be given its grammatical and ordinary meaning unless it would result in some absurdity or some repugnancy or inconsistency with the rest of the instrument.”
“Recourse to authoritative dictionaries is, of course, a permissible and often helpful method available to the Courts to ascertain the ordinary meaning of words,” notes Hefer JA in Fundstrust v Van Deventer. “But judicial interpretation cannot be undertaken, as Schreiner JA observed in Jaga v Dönges […] by ‘excessive peering at the language to be interpreted without sufficient attention to the contextual scene’.” In Joubert’s words, “The mode of construction should never be to interpret the particular word or phrase in isolation (in vacuo) by itself.”
Parol evidence rule
When a contract has been reduced to writing and litigation subsequently takes place concerning the contract or its terms, it happens not infrequently that one, if not both, of the parties desires to give oral evidence to show that the terms of the contract were other than those embodied in the document. A party relying on a written contract must prove its existence, and obviously oral evidence by or for him is admissible for that purpose. It follows that the other party to the case may in turn, by oral evidence, prove facts that show the written document did not constitute a contract at all—for example, that it was forged.
As regards the contents or terms of the written agreement, however, there is a very definite rule of law, known as the parol evidence rule, which places strict limits on the evidence that may be adduced in aid of interpretation. The rule dictates that, where the parties intended their agreement to be fully and finally embodied in writing, evidence to contradict or vary the terms of the writing, or to add to or subtract from them, is inadmissible. No evidence to prove the terms maybe given save the document itself (or, if it is lost, secondary evidence of its contents), nor may the contents of the document be contradicted, altered, added to or varied by parol or oral evidence, relating to what passed between the parties either before the written instrument was made or during its preparation. Where the parties have decided that a contract should be recorded in writing, their decision must be respected and the resulting document accepted as the sole evidence of the terms of the contract. The document itself, in other words, discloses the obligations.
From this it should be clear that the parol evidence rule applies only to written contracts. It does this by its very nature. The rule applies to all contracts in writing, whether or not the law requires that they be in writing to be valid. Further, the rule applies not only to express terms (terms actually in the written contract), but also to terms implied by law. For example, where land is sold, an obligation to pay the costs of transfer is, in the absence of express provision to the contrary, imposed by law on the seller. It follows that, if a written contract of sale of land makes no reference to the costs of transfer, the seller is not allowed to give evidence of an alleged prior agreement with the purchaser that the latter is to pay these costs.
The rule is generally binding only on the parties to the contract, not on third persons, for the latter may normally lead evidence to contradict or vary the contents of the contract. When, however, the issue in dispute (even between third parties) is what the obligations of the contracting parties to one another are, and those obligations are stated in a written contract, the integration rule is applicable.
It must be noted that the rule does not apply to oral agreements made after the written document was completed. Consequently, evidence may be given of a subsequent oral agreement altering or cancelling the written agreement, except where the contract is required by statute to be in writing, for such a contract cannot be varied by a later oral agreement, though it may be cancelled by such an agreement. Similarly, where the contract itself provides that it can be varied only in writing an oral variation is void, and so too, it seems, is an oral agreement to cancel the contract.
The rule excluding oral evidence derives not from the Roman-Dutch law, but from the English law of evidence, which has been adopted throughout South Africa by legislation.
Because it places strict limits on the evidence that may be adduced in aid of interpretation, the rule forms a background to all interpretation. It often operates to prevent the leading of valuable evidence, but, for all its difficulties, it serves the purpose of ensuring that, where the parties have decided that a contract should be recorded in writing, their decision will be honoured and the resulting document accepted as the sole evidence of its terms. Union Government v Vianini Ferro-Concrete Pipes is the leading case here:
Now this Court has accepted the rule that when a contract has been reduced to writing, the writing is, in general, regarded as the exclusive memorial of the transaction and in a suit between the parties no evidence to prove its terms may be given save the document of secondary evidence of its contents, nor may the contents of such document be contradicted, altered, added to or varied by parol evidence.
Evidence of earlier negotiations, for example, is usually inadmissible. This aspect of the rule, which is the background to all the other rules of interpretation, is known as the integration rule.
Integration rule
“It is clear to me,” wrote Corbett JA in Johnston v Leal,
that the aim and effect of this rule is to prevent a party to a contract that has been integrated into a single and complete written memorial from seeking to contradict, add to or modify the writing by reference to extrinsic evidence and in that way to redefine the terms of the contract. The object of the party seeking to adduce such extrinsic evidence is usually to enforce the contract as redefined or, at any rate, to rely upon the contractual force of the additional or varied terms, as established by the extrinsic evidence.
The integretation aspect of the parole evidence rule therefore “defines the limits of the contract.” The parties have “integrated” their negotiations into a single document, which should be regarded as the complete and final expression of their will: an “exclusive memorial” of their agreement. The purpose of this rule is to prevent a party from claiming other than what is provided for in the document. In Le Riche v Hamman, for example, Hamman sued to transfer one Victory Hill, which had been sold to Le Riche in error. Le Riche relied on oral evidence, but the parol evidence rule dictates that the court look first at the ordinary meaning of the contract. As this was clear and unambiguous, and did not, in its description of the land, refer to Victory Hill, Le Riche was unsuccessful.
Whether the document amounts to an integration of the agreement depends on whether the parties intended it to be the exclusive record thereof. The extrinsic evidence is excluded because it relates to matters that, by reason of the reduction of the contract to writing and its integration in a single memorial, have become legally immaterial or irrelevant.
The parol evidence rule is inapplicable when the question before the court is whether or not the parties actually intended to draw up an exclusive memorial in the first place, and when it is apparent that a written document was not so intended; indeed, the rule applies only to written contracts, and comes into play only once everyone is satisfied that a contract actually exists. Furthermore, the rule does not apply if the document in question represents only one part of the contract, or if the contract is partly written and partly oral, which is the same as saying that the document was not intended, as it must, to be the whole body of the contract. It must apply to the contract in its entirety. The rule is also inapplicable when:
A written proposal, instead of being accepted simpliciter (which would bring the rule into operation), is orally modified before its acceptance
A written contract is modified by a subsequent oral or written agreement between the parties, so that they no longer intend it to embody their whole contract
The integration rule is only a backstop, however; it comes into operation in the absence of some more dominant rule. It does not operate when an aggrieved party alleges fraud, misrepresentation, mistake, undue influence, duress or illegality, as in such cases the problem is with the foundation of the document, not with its interpretation. Although the integration rule does not exclude evidence of any subsequent oral agreement, a non-variation clause may be deployed to forestall such a thing. Nor does the rule prevent the leading of evidence to show that the written document was subject to a precedent condition not expressed in the document, provided the condition is a true condition which suspends the operation of the contract without varying any of its terms.
Where the rule excluding oral evidence does not apply
Since the rule excluding oral evidence applies only to evidence that varies terms or contents of the written document, it follows that oral evidence is admissible that does not vary or modify the terms: namely, evidence that relates to:
The existence or validity of the written contract
Explanation of its terms
Collateral agreements not inconsistent with the written contract
Oral evidence relating to the existence or validity of the contract
Oral evidence may be given to the effect that the written document did not in fact constitute a contract at all: for example that:
The document was not intended by the parties to be binding on them, but that it was a blind to deceive other persons, and that the real contract was a prior oral agreement.
There was a prior oral agreement constituting a condition precedent to the contract’s coming into effect, and that it had not been fulfilled.
The contract was void on the ground of mistake, illegality impossibility or lack of consensus.
It was voidable, for instance, on the ground of incapacity of one of the parties, or on the ground of misrepresentation.
The contract was subject to rectification by the court on the ground that, owing to a mistake, a term or condition had either been incorrectly inserted or described in the written contract, or had been omitted from it.
The contract had been entered into on the basis of a common, false supposition.
Evidence may also be given of a prior verbal discussion to determine whether a term imposing a particular obligation was implied.
Oral evidence to explain the terms of the contract
Extrinsic evidence is always admissible to show to what persons or things or matters the terms of a contract refer, when these facts cannot be determined from the document itself. In such a case the contract is not varied, but merely applied. Oral evidence may be given, therefore,
to identify persons or things referred to in the written document;
to explain technical expressions or phrases, or words used in a peculiar sense different from the ordinary meaning by reason either of special circumstances, or by virtue of trade usage (provided, it seems, that the usage is not inconsistent with the clear terms of the written document); or
to elucidate ambiguous expressions (those capable of more than one meaning, either in themselves or as used with their context);
but not, apparently, where the language is clear and explicit, or where the meaning of the word is a matter of law.
Collateral agreements
Parol evidence is always admissible to show that the written contract is only part of the whole transaction, and that a separate oral agreement made at the same time was not incorporated in the written agreement—provided that the oral agreement referred to a matter on which the document is silent, and is not inconsistent with the terms of the written contract. It follows in these circumstances that two contracts may be proved, the one written and the other oral. Evidence, therefore, may be given of:
An agreement for consideration additional to that mentioned in the written contract
A collateral inducement by which one of the parties was persuaded to enter into the contract, even if the written agreement is one required by the law to be in writing
On the other hand, evidence of an oral agreement is not admissible if its terms are inconsistent with those of the written agreement—as, for example, where the acceptor of a bill of exchange alleges that the payee had orally agreed with him that he would be liable for the full amount of the bill. Similarly, where a deed of sale of land sets out the purchase price and also states that the land is sold without encumbrances, evidence is not admissible of a prior or contemporaneous oral agreement that the price was fixed at some other figure, or that the land was sold subject to a servitude.
Likewise, where there are not two collateral agreements but one composite contract, a portion of which is written and the remainder oral, evidence may be led to prove the supplemental oral portion, provided it is clear that the parties did not intend the written portion to be the exclusive memorial of the entire agreement. In such a case, termed a “partial integration,” the integration rule merely prevents the admission of extrinsic evidence to contradict or vary the written portion of the agreement. The court may hear evidence of surrounding circumstances, including the negotiations of the parties, to determine whether they intended the written agreement to be an integration of their whole transaction or merely a partial integration.
Interpretation rule
The integration aspect of the parol evidence rule is supplemented by the interpretation rule, “which determines when and to what extent extrinsic evidence may be adduced to explain or affect the meaning of the words contained in a written contract.” In other words, it controls the kind of evidence that may be led to establish the meaning of contractual provisions. Irrelevant evidence is inadmissible: It is a general rule that no evidence may be led to alter the clear and unambiguous meaning of a contract, whether written or oral.
When, therefore, the contract as written is lacking or incomplete, there is no problem with then referring to extrinsic evidence. This is not in conflict with the integration rule:
Where ex facie the document itself the contract appears to be incomplete, the object of leading extrinsic evidence is not to contradict, add to or modify the written document or to complete what is incomplete so that the contract may be enforced thus completed, but merely to explain the lack of completeness, to decide why the parties left blanks in a particular clause and what the integration actually comprises, and in this way to determine whether or not the document constitutes a valid and enforceable contract […]. Consequently, it does not seem to me that the admission of such extrinsic evidence for this purpose […] would be either contrary to the substance of the integration rule or likely to defeat its objects.
Although necessary, the rule can lead to injustice if too rigorously applied by excluding evidence of what the parties really agreed. The courts try to prevent the rule’s use as an engine of fraud by a party who knows full well that the written contract does not represent the full agreement.
In the quest to exclude irrelevant evidence, the courts have historically drawn a distinction between background circumstances and surrounding circumstances, with the former being admissible and the latter usually not. Coopers & Lybrand v Bryant describes the “correct approach to the application of the ‘golden rule’ of interpretation after having ascertained the literal meaning of the word or phrase in question.” This case should be read with Delmas Milling v Du Plessis, which cites the same three classes of evidence:
Textual context
The courts must have regard firstly (after determining the literal meaning) to “the context in which the word or phrase is used with its interrelation to the contract as a whole, including the nature and purpose of the contract.” If there be difficulty, even “serious difficulty,” it should “nevertheless be cleared up by linguistic treatment,” if this is possible.
While grammatical meaning is the starting point of interpretation, words depend by necessity for their meaning on the contract as a whole. An understanding of the meaning of individual words must be gained from the wording of the contract as a whole: “It is, in my view, an unrewarding and misleading exercise to seize on one word in a document, determine its more usual or ordinary meaning, and then, having done so, to seek to interpret the document in the light of the meaning so ascribed to that word.” The next step, accordingly, is to interpret the wording of a contract in the context of other provisions in the document read as a whole: that is, the textual context. This is done to give effect to the contract, rather than to make it ineffectual. The words are to be construed in their extended context: One may point to one of several “ordinary” meanings, or to an unusual or technical meaning.
Broader context
If, then, the language of the contract is clear and unambiguous, or if any uncertainty that may exist can be resolved satisfactorily by linguistic treatment, evidence of “surrounding circumstances”—that is to say, “matters that were probably present to the minds of the parties when they contracted”—is unnecessary and therefore inadmissible: cum in verba nulla ambiguitas est, non debet admitti voluntatis quaestio. If intra-textual treatment does not clearly yield the intention of the parties, the interpreter must look to the extended context to draw useful inferences from the nature of the contract, its purpose and the background against which it was concluded. In other words, only if a consideration of the language in its contextual setting fails to produce sufficient certainty (the degree of certainty required being left to the discretion of the individual judge) may evidence of “surrounding circumstances” be led. Even then, however, recourse may not be had to evidence of what passed between the parties in the course of negotiating the contract unless a consideration of the “surrounding circumstances” fails to resolve the difficulty.
If the problem cannot be sorted out with reference to the language, a court may be informed of the background circumstances under which the contract was concluded. These are matters of an uncontentious nature, such as the relationship in which the parties stood to one another at the time of contracting, which may help to explain the context of the contract. They convey “the genesis and purpose of the contract, i.e. […] matters probably present to the minds of the parties when they contracted,” but not the actual negotiations and similar statements. The sole purpose of such evidence, it is still said, is to enable the court to understand the broad context in which the words requiring interpretation were used. Although “it is commonly said that the Court is entitled to be informed of all such circumstances in all cases,” this does not permit it to arrive at a different interpretation if the meaning is already clear from the words themselves.
Surrounding circumstances
Finally, but only “when the language of the document is on the face of it ambiguous,” and its meaning therefore uncertain, the courts may consider surrounding circumstances: “what passed between the parties during the negotiations that preceded the conclusion of the agreement.” These include “previous negotiations and correspondence between the parties, [and] subsequent conduct of the parties showing the sense in which they acted on the document, save direct evidence of their own intentions” (by which is meant actual negotiations between the parties).
Where even the use of surrounding circumstances does not provide “sufficient certainty”—where, that is, there is ambiguity in the narrow sense—and there is still no substantial balance in favour of one meaning over another; where, in other words, the case is one “of ‘ambiguity’ as opposed to mere ‘uncertainty,'” then “recourse may be had to what passed between the parties on the subject of the contract.” The court may also refer to evidence of the parties’ negotiations: the way they acted in carrying the contract out. The court should use outside evidence as conservatively as possible, but use it if necessary to reach what seems to be sufficient certainty as to the meaning. The court is still not allowed, however, to hear evidence as to what the parties subjectively thought the disputed term meant.
Criticism
The golden rule of interpretation, together with the principles reflected in Delmas, has in recent years endured much criticism. The trend, in recognition of this, has been to erode the influence of the parol-evidence rule, admitting rather more kinds of evidence than fewer, although the practice of allowing all evidence has been also been criticised.
No court, yet, has gone so far as to overturn Delmas—judges usually confine their disapproval to obiter dicta—but it remains the case that the rules of interpretation in the South African law of contract are themselves hard to interpret, so that it falls to the particular views of each individual judge.
Too literal
The contention is made that so literalist an approach overlooks the fact that language may be imprecise, with no single meaning. The contention that words are always susceptible to one clear meaning is doubious. If this were the case, there would very rarely be the need to approach the court to interpret them.
Too hierarchical
The hierarchical nature of the exercise has also been criticised. While its rigid procedures may look good on paper, moving progressively, until a solution is found, through all the options available, in practice it is difficult to apply in court; indeed, the courts very rarely follow it, as it extends proceedings unnecessarily; instead the whole exercise is usually integrated, with counsel leading as much evidence as possible.
There is, therefore, a clear disconnect between theory and practice in this area of the law, although judicial support has been expressed for a more liberal approach to interpretation. The oft-quoted assertion that “the rule of interpretation is to ascertain, not what the parties’ intention was, but what the language used in the contract means, i.e. what their intention was as expressed in the contract,” has been treated very circumspectly. The principle tends to obscure the consensual basis of the South Africa law of contract, it is said, and is not inflexible, but subject to qualification. The words employed in a contract cannot be viewed in isolation, divorced from the matrix of facts in which they are set, if the intention of the parties is to be ascertained. While the first step in construing a contract is still to ascertain the ordinary, grammatical meaning of the words used, “it should be recognised that very few words have a single meaning, and even the ‘ordinary’ meaning of a word may vary according to, or be qualified by, the factual context in which it is used.” A court should therefore be alive to the various possible meanings of the words, and should not approach the matter on the basis that a particular meaning predominates. It should also have regard to the nature and purpose of the contract, as well as the context of the words in the contract as a whole.
Terminologically confusing
Clearly the line between such “background circumstances” and other “surrounding circumstances” is a fine one. It has been contended, indeed, that the distinction between background and surrounding circumstances is imprecisely drawn. “Perhaps,” as Lewis AJA put it in Van der Westhuizen v Arnold, “it is a distinction without a difference.” It is clear that “background circumstances” are always admissible, whereas “surrounding circumstances” are admissible only when linguistic treatment is unsuccessful: that is, where ambiguity exists. It is unclear, however, what separates them in substance. Background circumstances are “matters probably present to the minds of the parties when they contracted,” while surrounding circumstances have been defined as “what passed between the parties during the negotiations that preceded the conclusion of the agreement.” It stands to reason, though, that “what passed between the parties during the negotiations that preceded the conclusion of the agreement” very often includes “matters probably present to the minds of the parties when they contracted.” So difficult has it proven in practice to separate them that “no-one knows precisely what the dividing line between the two categories is.” The whole procedure has been “bedvilled by the haziness,” and the future utility of the distinction is questioned.
The question was raised as far back as 1979, in Cinema City v Morgenstern Family Estates, “whether the stage of development has been reached where the ‘open sesame’ of uncertainty may be dispensed with as a prerequisite to opening the door to evidence of surrounding circumstances, in either a limited or wider sense.” This would have gone some way toward eliminating the background-surrounding differentiation. The court found, though, that it was “unnecessary to express any opinion” on the matter for the purposes of that case.
The question is now being asked, “pertinently,” why evidence of “surrounding circumstances” should not be admissible in all cases, if the goal is to place the court as near as may be in the situation of the parties to the instrument. Such an approach would be “less artificial, more logical, consistent with modern thinking on the meaning of language, and would avoid the danger of a court enforcing a term in a contract to which neither party subscribed.”
No court yet has gone so far as to rescind the Delmas paradigm. The courts continue to profess allegiance to the traditional approach. Nevertheless, an apparently more liberal attitude to the admission of evidence of contextual facts, however classified, as well as a growing emphasis on purposive interpretation, “herald a more flexible and sensible approach in practice.” The strongest judicial attack on Delmas to date was launched by Harms DP in KPMG v Securefin:
The integration (or parol evidence) rule remains part of our law. However, it is frequently ignored by practitioners and seldom enforced by trial courts […]. The time has arrived for us to accept that there is no merit in trying to distinguish between “background circumstances” and ‘surrounding circumstances”. The distinction is artificial and, in addition, both terms are vague and confusing. Consequently, everything tends to be admitted. The terms “context” or “factual matrix” ought to suffice.
This obiter dictum has been read as effectively heralding a new era in the interpretation of contracts in South Africa, suggesting that the Supreme Court of Appeal will abandon the distinction “as soon as it is presented with an opportunity to do so.”
Circumventing the parole evidence rule
A litigant can circumvent the parol evidence rule by alleging a tacit term or by applying for rectification. Evidence relevant to such an allegation or application then becomes admissible, although it would have been inadmissible for the purposes of interpreting a written term of the contract.
Rectification
Rectification is a process that allows a party, under certain conditions, to amend the contents of the original document to reflect the original common intention. One may bring to this process extrinsic evidence, including negotiations, to convince the court to order the document’s rectification.
In cases where the contract must be written in order to exist, the parol evidence rule applies. Although this would suggest that the document cannot be rectified by order of court, the case of Meyer v Merchants Trust, where such a document was rectified, shows that it can. The offending clause in that case read as follows:
I do hereby bind myself as surety […] for the payment of all monies which may be owing by Gabbe & Meyer to their creditors […] provided that the total amount recoverable from me notwithstanding the amount that may be owing by Gabbe & Meyer shall not exceed 250 pounds.
The typist had left out the word’s homoeoteleuton. There was accordingly an attempt to claim rectification on the basis of the misrecording. The bank contended that this was not possible, because surety agreements, always and necessarily written, cannot be rectified. The Appellate Division disagreed.
Canons of construction
Where the meaning of a contract remains unclear despite application of the primary rules (whereby the court establishes the intention of the parties by considering the ordinary grammatical meaning of the words in their textual and extra-textual context), the courts use various further canons of construction.
Secondary rules of interpretation
Secondary rules include rules or presumptions:
Against tautology or superfluity, such that, when examining a contract, its every word is seen to have relevance and purpose
That, in the case of two similar written contracts, a deliberate change in expression or language in the second, where it is drafted with the first in mind, should be taken prima facie to import a change of intention
That written or typed insertions in a printed agreement are interpreted as a more accurate reflection of the parties’ intention than the printed terms, since these were deliberately selected by the parties themselves for the expression of their intention
That inconvenience ought to be avoided, in favour of constructions that lead to less of it, and in accordance with the dictates of commercial efficiency
That greater weight should be given to special provisions than to general ones (generalia specialibus non derogant);
That, when words with a general meaning are used in association with words relating to a species of a particular class, the general word is restricted in meaning to the same class as the specific words (the eiusdem generis or noscitur a sociis rule)
That, if a later provision qualifies an earlier provision, effect is to be given to the later qualifications;
That, in the same vein, words are known or understood by the company they keep (noscitur a sociis), so that they should be read in their context, not in isolation
That preambles are subordinate to the operative part of a contract if they are sufficiently clear
That, where the language of the contract or a term is ambiguous—where, in other words, it is capable of more than one meaning—the court place the construction on it that upholds the contract, rather than one that makes it illegal and void (interpretatio chartarum benigne facienda est ut res magis valeat quam pereat);
That, where the terms of a contract are ambiguous or vague, but the conduct of the parties shows that they have both given the same meaning to the words used, the court gives effect to that meaning;
That the parties intended their contract to be legal rather than illegal;
That, when a contract is ambiguous, the principle that all contracts are governed by good faith means that the intention of the parties is determined on the basis that they negotiated in good faith;
That the parties intended their contract to have a fair result, although the unambiguous wording of a contract must not be departed from on equitable grounds, which has the paradoxical effect of ensuring that the courts do not in the interpretative process give one of the parties an unfair or unreasonable advantage over the other; and
Against the implication of a term when an express term already covers the relevant ground (expressio unius est exclusio alterius, or expressum facit cessare taciturn). Where special mention is made of a particular thing or obligation, some other thing or obligation otherwise normally be implied in the circumstances is excluded. Express mention of one item indicates an intention to treat differently items of a similar nature that have not been mentioned. A lease agreement that forbids the tenant to fish in the dam may generally be taken to mean that he may fish in the river. On the other hand, a lease that tells him he may not cut down the gum trees on the property does not thereby entitle him to fell the oaks, the gum trees having been mentioned ex abundanti cautela.
Tertiary rules of interpretation
As a last resort, the courts may use tertiary rules of interpretation. The goal here, a divergence from prior procedure, is rather to set up a fair outcome than to give effect to the parties’ common intention. These tertiary rules include
the quod minimum rule, which states that ambiguous words must be narrowly interpreted, so as to encumber a debtor or promisor as little as possible;
the contra stipulatorem rule, which states that a clause, in case of doubt, is interpreted against the person who stipulates for something (the creditor), and in favour of the promisor or debtor (in stipulationibus cum quaeritur quid actum sit, verba contra stipulatorem interpretanda sunt), the point being to limit the operation of the stipulation and to burden the debtor as little as possible; and
the contra proferentem rule, which states that ambiguous terms of a contract are to be interpreted against the party who proposed them. The proferens is the party to the contract who is responsible, either himself or through an agent, for the wording of the ambiguous contract. The reasoning is simply that, if the wording is ambiguous, its author should be the one to suffer, as he had it in his power to make his meaning plain. The ambiguity is presumed to be due to his negligence in not having expressed himself more clearly when it was in his power to do so (verba fortius accipiuntur contra proferentem). Thus, where an insurance company frames a question that can have two reasonable meanings, the court adopts the one more favourable to the insured person.
The contra stipulatorem rule rests on the same basis as the contra proferentem rule, for the stipulator (promissee) was the person responsible for couching the stipulation in whatever language she chose. These rules ‘reflect a normative commitment grounded in fairness and good faith rather than a search for the parties’ intentions’.
Similarly, an interpretation putting an equitable construction on ambiguous words is favoured. A court will not adopt a meaning that gives one party an unfair advantage over the other. The courts also seek to safeguard common-law values and principles. Moreover, due regard must be had to any possible implication the Constitution might have.
When all rules are exhausted
If a court, having gone through all the rules of interpretation, is still unable to give meaning to the contract (in which case it must have been too poorly written to admit of any interpretation), it is declared void for vagueness.
Disclaimers, indemnities and exemption clauses
In the interpretation of disclaimers, indemnities and exemption clauses, the courts give effect to language that exempts the proferens from liability in express and unambiguous terms. If, however, there is ambiguity, the language is construed against the proferens—but a court must not adopt a strained or forced meaning in order to import some ambiguity.
Subjective versus objective
South African law seems to be moving from a relatively objective approach to interpretation, with a correspondingly restrictive attitude to admissibility of evidence, to one that is more subjective: that is, one whose aim is to discover what the parties subjectively intended.