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The Impact of Pacta Sunt Servanda in the Law of Contract

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The Impact of Pacta Sunt Servanda in the Law of Contract The impact of pacta sunt servanda in the law of contract by Miranda Mayuri Pillay 28186886 Under the supervision of Advocate A Nagtegaal Submitted in partial fulfilment of the requirements for the degree: LLM In the Faculty of Law, University of Pretoria October 2015 SUMMARY The research in this dissertation investigates the impact of pacta sunt servanda in the South African law of contract. The notion that agreements seriously entered into must be honoured is an age-old principle which has found recognition in South African law. The common law foundational principles of contract law are explained and the impact of the Constitution on these principles is analysed. The Constitution is the highest law in the land and all law, including the common law, must conform to it. The cornerstones of the South African law of contract are good faith, freedom of contract, sanctity of contract and privity of contract. The competing common law foundational values are discussed with particular emphasis on the principles of sanctity of contract and freedom of contract. The notion of freedom of contract is a constitutionally recognised principle which is associated with party autonomy and denotes minimal state interference. Pacta sunt servanda states that obligations created in terms of an agreement must be honoured; therefore parties who enter into contractual agreements with the relevant intention are obliged to respect the agreement. There are many dimensions to a contract which affect its meaning as a legal instrument, apart from the legal dimension there is also a structural dimension of contracts. With regards to the structural dimension, the interpretation and the drafting of contracts is relevant because this is the process by which the agreement between the parties is codified and interpreted. In order for the principle of pacta sunt servanda to operate successfully in contractual agreements, the written contract must clearly indicate the intention of the parties. In this research both interpretation and drafting of contracts will be examined to identify their impact on the principle of pacta sunt servanda. Pacta sunt servanda influences the interpretation and drafting of contracts and must therefore always be considered when executing contractual agreements. The case law in this research highlights the fact that courts are in favour of contractual validity and have accepted pacta sunt servanda as a cemented principle in the South African law of contract. 2 ACKNOWLEDGMENTS I would like to thank all my family and friends who have supported me during my LLM. I would not be in this position if it were not for my Dad, Mr Cliff Pillay. Thank you for always believing in me and supporting me throughout my career. The lessons I have learnt from you are invaluable and I will carry them with me throughout my life. I am thankful for all the sacrifices you have made for me and for motivating me to always be better. Thank you to my mum, Sandy Pillay. Special thanks to Adv Annelize Nagtegaal for assisting me far and wide with the writing of this dissertation. Thank you to Professor Steve Cornelius for inspiring me and advising me from beginning to end. 3 TABLE OF CONTENTS: Page 1. Introduction 5 2. The Constitution and pacta sunt servanda 9 3. Interpretation of contracts and the principle of pacta sunt servanda 15 3.1 . General 15 3.2 . The technique of interpretation 16 3.2.1. Subjective theory of interpretation 18 3.2.2. Holistic approach to interpretation 20 3.3 . Terms of a contract 22 3.3.1. Consensual tacit terms 23 3.3.2. Imputed tacit terms 24 3.4. Parol evidence rule 26 3.5. Problems that arise in the interpretation of contracts 31 3.6. Final remarks on interpretation of contracts 33 4. Principles of drafting contracts that affect the common law contractual principle of pacta sunt servanda 33 4.1.General 33 4.2. Consensus as basis of a contract 35 4.2.1. Establishing consensus in a contract 35 4.2.2. Signature as an indication of consensus 37 4.3. Drafting guidelines 42 5. Conclusion 45 4 1. Introduction Contractual law principles in South Africa are derived from the common law. The common law co-exists with the constitutional democracy and the Constitution requires that all law, including the common law, must conform to it.1 In terms of the common law consensus and reliance are fundamental concepts in the law of contract.2 This is because all modern contracts are consensual in that they are based on agreement. Where true consensus is absent, the reliance theory can form the basis of liability if it can be shown that there was a reasonable belief of the existence of consensus. In the case of Pieters & Co v Solomon3 the learned judge explained the moment at which a contract comes into existence and the impact of reservations in the minds of the parties. The following remarks were made in the case of Pieters & Co; “When a man makes an offer in plain unambiguous language, which is understood in its ordinary sense by the person to whom it is addressed, and accepted by him bona fide in that sense, then there is a concluded contract. Any unexpressed reservations hidden in the mind of the promisor are in such circumstances irrelevant. He cannot be heard to say that he meant his promise to be subject to a condition which he omitted to mention, and of which the other party was unaware.”4 Other fundamental ideas include the four cornerstones of the law of contract: these are values that inform the South African law of contract. The cornerstones are freedom of contract, sanctity of contract, good faith and privity of contract.5 Freedom of contract forms the foundation of the classical theory of contract, which still informs the South African law of contract regardless of the fact that 1 Section 2 of The Constitution of the Republic of South Africa, Act 108 of1996 (herein after referred to as “the Constitution”). 2 Hutchison & Pretorius (eds) (2012) 21. 3 Pieters & Co v Solomon 1911 AD 121. 4 Pieters supra n3 at 130. 5 Hutchison & Pretorius (eds) (2012) 21. 5 social and political values and conditions have changed. 6 The notion of freedom of contract dictates that the creation of a contract is through free choice and the state should therefore not interfere. The idea is that people are free to decide whether, with whom and on what terms to contract. This is also known as party autonomy.7 It was stated by the Constitutional Court in Barkhuizen v Napier8 that “freedom of contract has been said to lie at the heart of constitutionally prized values of dignity and autonomy”.9 The principle freedom of contract limits state interference and is in line with the notion of individualism. Thus the law of contract maximises the liberty of the individual.10 This implies that courts are not concerned with the substantive fairness of a contract but instead will enforce a contract provided the parties entered into the agreement voluntarily. The fact that contracts freely and fairly entered into will be enforced promotes legal certainty, and commercial certainty which is an essential requirement for a flourishing, free-market economy.11 The second cornerstone, sanctity of contract, entails that obligations in terms of a contract must be honoured because the contract was entered into voluntarily.12 Contracts freely and seriously entered into must be honoured and, if necessary, enforced by our courts.13 This principle is also known as pacta sunt servanda. In the case of Everfresh Market Virginia (Pty) Ltd v Shoprite Checkers (Pty) Ltd 14 the court described pacta sunt servanda as “…the age-old contractual doctrine that agreements solemnly made should be honoured and enforced (pacta sunt servanda).”15 In Barkhuizen,16 the court explained that “[p]acta sunt servanda is a profoundly moral principle, on which the coherence of any society relies. It is also a universally recognised legal 6 Hawthorne (1995) 157. 7 Hutchison & Pretorius (eds) (2012) 21. 8 Barkhuizen v Napier 2007 (7) BCLR 691 (CC). 9 Barkhuizen supra n8 at par 150. 10 Hawthorne (1995) 165. 11 Hutchison & Pretorius (eds) (2012) 22. 12 Hawthorne (1995) 173. 13 Hutchison & Pretorius (eds) (2012) 21. 14 Everfresh Market Virginia (Pty) Ltd v Shoprite Checkers (Pty) Ltd 2012 (1) SA 256 (CC). 15 Everfresh supra n14 at par 70. 16 Barkhuizen supra n8 at par 150. 6 principle.”17 It can be said that the primary aims of the principle of pacta sunt servanda are legal certainty and ensuring that contracting parties honour their obligations as a matter of morality. Hutchinson explains that: “If commercial enterprise is to take off on any significant scale, the parties must know that should either of them fail to honour their promise, the other might invoke the assistance of the law to hold them to the agreement… The State should and will lend its muscle for the enforcement of private bargains only if it is satisfied that it is fair and reasonable to do so in the circumstances. It must regulate, to some extent, the conclusion and performance of agreements, to ensure that there is no over-reaching or coercion, and that parties conduct themselves in an appropriate manner.”18 The notion of sanctity of contract goes hand in hand with freedom of contract, and these two principles seem to be in conflict with the foundational principle of good faith and fairness. 19 In the case of contracts perceived as incompatible with general social customs, the principle of freedom of contract and the rule that contracts seriously concluded should be enforced, are superseded by other policy considerations.
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