Basic Business Law. Lesson 4. Contractual Performance

Basic Business Law
Lesson 4: Contractual performance
Now that you have an idea how contracts are formed and interpreted, we can have a look at performing the
obligations that arises from the contract. The performance of these obligations remain the responsibility of
the parties to the contract.
It could sometimes happen that the legal person on which the obligation rest has to fulfil that obligation
through an agent or is unable to perform the obligation for some reason. So it could be argued that
knowledge of the law of performance is the most important component of contractual law for a lay person.
1 Agency
A legal person can perform most juristic acts through a representative (agent). Legal entities like companies,
close corporations or estates must necessarily act through a representative that is a natural person.
1.1 The nature of representation
Representation occurs where one person concludes a juristic act on behalf of another, with a third party. The
person who is represented is called the principal and the person who represents the principal is called an
agent. Once the representative act is completed’ it is the principal that is legally bound to the third party and
not the agent.
The requirements for an act of representation are the following:
• The principal must exist,
• the agent must have authority to perform the juristic act and
• the agent must make it clear that he is acting on behalf of someone else.
An agent does more than to pass information from one person to another as a messenger and is not limited
to perform only a specific task, on behalf of someone else, as a mandatory.
A person without legal capacity cannot represent another, but a person with limited contractual capacity can,
as he binds the principal and not himself. Anyone with contractual capacity can appoint an agent to act on
his behalf.
1.2 Authority
Authority can be given in writing, verbally or even through non–verbal conduct, as long as there is a
manifested intention that the other party performs a juristic act or acts on behalf of the principal.
Authorisation is a unilateral juristic act, which is a legal act that requires, and is performed by, one legal
person.
Other sources of authority include the following:
• For a company, the articles of association,
• for a close corporation , membership of the close corporation and
• for a partnership, the contractual relationship between the partners.
The given authority may include the power to delegate to a sub-agent, where the sub-agent is as capable to
perform the juristic act as the agent.
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An agent’s authority terminates when …
• the source of authority ceases to exist,
• the period for which it was given lapses,
• the agent performs the act for which authority was given,
• the principal dies, becomes insane or goes insolvent,
• the principal undergoes a change of status which diminishes his legal capacity,
• the authority is revoked or
• the agent becomes insane.
Example
A tour operator will typically book a flight for tourists, arrange for the transfer from the airport to the hotel and
design a tour itinerary for their clients. In doing so the tour operator inevitably acts as an agent for a variety of
other businesses.
1.3 Ratification
Ratification is a unilateral juristic act where the principal expresses his intention that an agreement, entered
into by an agent without the principal’s authority, be regarded as if it was duly authorised.
Example
Sandy is aware that her friend Wendy wants to sell her car but has not been authorised by Wendy to act as
her agent. One night she speaks to another friend, Joan, and discover that Joan is looking for the exact car
that Wendy wants to sell. She claims to be representing Wendy and agrees with Joan on a price for Wendy’s
car.
When Sandy tells Wendy about the agreement, she can ratify the agreement in its entirety and sell the car to
Joan as if Sandy was indeed properly authorised to act on her behalf. If she doesn’t want to sell the car to
Joan under the agreed terms, the contract will be void, but Joan will have a claim for damages against
Sandy.
Ratification must adhere to the following requirements.
• The principal must have been in existence when the agreement was made.
• The agent must have professed to be contracting as a representative.
• The principal must have the capacity to ratify.
• The principal must ratify the contract in its entirety.
• The ratification must take place within a reasonable time.
Ratification is not possible when…
• A statute requires agent’s authority.
• The principal can no longer enter into the contract himself.
• The principal lacks capacity to enter into the agreement.
• The agreement is illegal.
1.4 Estoppel
Estoppel occurs when the courts precludes the principal from escaping liability when he refuses to ratify an
unauthorised contract entered into by someone claiming to be an agent.
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The requirements for estoppel are the following:
• The principal represented to the third party that the agent did have his
authority or he kept silent when he was under a duty to speak,
• the representation misled the third party into believing that the agent was authorised and
• the third party acted on the strength of the presentation.
A principal held liable in terms of estoppel will have legal recourse against the agent.
Example
Sandy use to be an agent of car dealer Wendy but has since left her employ. She is still aware of a car that
Wendy wanted to sell. One night she speaks to a friend Joan and discovers that Joan is looking for the exact
car that Wendy wants to sell and agrees terms of sale with Joan. Joan had bought cars from Wendy through
Sandy before and when she saw Wendy a week ago Wendy indicated to Joan that Sandy was a great agent,
even though Sandy had already left her employ.
Wendy may refuse to ratify the agreement in its entirety based on the fact that Sandy wasn’t authorised to
act on her behalf. Joan can then approach the court and stop Wendy from escaping the liabilities that was
created by the agreement, because all Wendy’s actions gave her the impression that Sandy was indeed still
her agent.
1.5 Liability of the unauthorised agent
If someone claims to be an agent but acts without authority such a person will not be bound to the contract
entered into, but the third party may hold him liable for the following damages:
• Damages for breach of contract
• Delictual damages for misrepresentation and
• Damages for breach of an implied warrantee.
1.6 The doctrine of the undisclosed principal
An agent must make it clear that he is acting on behalf of another legal person or the principal will not be
bound by the contract.
The doctrine of the undisclosed principal states however that the principal is entitled to step into the shoes of
an authorised agent, once consensus with the third party was reached, and reveal that he is indeed the real
party to the contract.
The following requirements must be met:
• The agent must be authorised,
• the agent must intent to act in the principal’s behalf,
• the agent must fail to disclose his representative capacity,
• the agent must be acting on behalf of one principal only,
• there may not be any clause in the contract disallowing the doctrine and
• the third party doesn’t have a good reason for wanting to contract with the agent personally.
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Example
Wendy wants to sell her car and have authorised her friend Sandy to sell the car
on her behalf if the opportunity presents itself. One night Sandy speaks to her friend Joan and discovers that
Joan is looking for the exact car that Wendy wants to sell. Joan and Sandy then conclude an agreement for
the sale of the car, but Joan thinks the car is Sandy’s.
Wendy can now be revealed as the real owner of the car and will be contractually bound to Joan, as it can
be argued that Joan would have agreed to the terms of sale regardless of with whom she was contracting
with.
2 Performance
2.1 The form and manner of performance
Performance must take the form specified in the contract unless it is clear that the parties contemplated
performance of an equivalent kind. A person cannot be compelled to accept another article even if the
substituted article is as good as or better than, the article stipulated, and it is difficult, inconvenient, or expensive,
for the seller to deliver it.
2.2 The time of performance
If a date for payment is fixed the debtor has until the last moment of that day to make payment, even if it is
agreed that payment may be made by cheque.
Where no time for performance is agreed upon, then performance must be rendered immediately or within a
reasonable time depending on the case.
Common law allows a debtor to pay the debt before the stipulated payment date if the future payment date
was inserted in the contract purely for his benefit.
If it is shown that the time provision was inserted for the benefit of the creditor as well, as is normally the
case with interest bearing loans, then the creditor may refuse to accept early payment unless the debtor also
pays interest on the amount of the debt up to the stipulated date of payment. - In respect of certain debts,
statute has intervened to allow a debtor to make early payment and secure a recalculation of interest.
If the debtor and creditor undertake to render reciprocal performances under the contract the debtor is not
obliged to perform unless the creditor has either performed or tendered to perform his own obligation.
2.3 The place of performance
Where the parties have not agreed on a place for performance but have fixed a time, the debtor must seek
out the creditor for the purpose of rendering the performance to him. Where neither a place nor a time for
performance is agreed upon, the creditor is obliged to seek out the debtor to obtain performance.
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2.4 The person who must render performance.
In general performance may be rendered by an agent of the debtor or by a third person without the authority
or knowledge of the debtor unless it is clear from the terms of the contract, the nature of the performance to
be rendered, or other surrounding circumstances, that it is the debtor himself who must render the
performance in question. If, for instance, one hires a particular architect to design a building then, the
architect may not delegate the work to another person.
2.5 The person who must accept performance.
If the creditor names a third party as his agent to receive the performance, the debtor may render
performance to the agent, but is not obliged to do so.
If the parties agreed that performance may or must be rendered to a third party, the creditor is not entitled to
unilaterally prohibit performance to the third party and claim the performance to except in the following
cases:
• Where the debtor has no interest in performing to the third party.
• Where the creditor will suffer loss if the performance is rendered to the third party.
If the debtor performs to a person to whom the creditor owes a debt without the creditor's consent and the
creditor ratifies the receipt of performance by that person, then the debtor is discharged, but if the creditor
declines to ratify the receipt of the performance, the position is unclear.
Example
Tom owes Dick a money debt of R500, and Dick owes Harry a money debt of R1000. Harry convinces Tom
to pay him the R500 instead of paying it to Dick and Tom agrees.
If Dick ratifies the agreement that Tom made with Harry on his behalf, Tom will not owe Dick anything and
Dick will owe Harry only R500.
2.6 Payment where more than one debt due
Where the debtor owes more than one debt to the creditor and makes a payment which is insufficient to
discharge all the debts, he must indicate expressly to which debt/s his payment is to be applied.
If he gives no such indication and the circumstances do not suggest an appropriation, the creditor is entitled
to choose the debt to which to apply the payment provided he informs the debtor of his intentions at the time
that the debtor makes his payment and gives him an opportunity to stipulate otherwise.
If the creditor does not make an appropriation in this manner, he is required to apply the payment to the most
onerous debt or, if the debts are equally onerous, to the oldest of them, or, if equally burdensome and old, to
all the debts proportionately.
An exception is made to the rule that the payment must be appropriated to the most onerous debt where the
debts are capital and there is interest thereon. The creditor must first credit the account relating to interest
before that of the principal sum.
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2.7 Proof of performance
If a party alleges that he has rendered performance the onus is on him to prove it.
2.8 Performance frustrated by the creditor
If the debtor tenders proper performance to the creditor and the latter refuses it, the debtor is not regarded as
being in breach of his contractual obligation and cannot be held liable for non-performance.
The same principal applies where the creditor makes it impossible for the debtor to perform in accordance
with the terms of the contract. For example, if someone provides a delivery address for the delivery of a
product that he bought but is not at the address to take the delivery, the deliverer will not be in breach of the
agreement.
3 Contractual Breach
3.1 Excuses for Non-Performance
In certain cases, a party is excused from carrying out his side of the contract and, therefore, is not subject to
the remedies for breach of contract.
Set-off
A party is excused from performing if the other party owes him a debt as well and the second debt can be
set-off against the first party's debt.
For set-off to operate the following requirements must be met.
• The parties must be indebted to each other only,
• they must owe and be owed in the same capacity,
• the debts must be of the same kind,
• the debts must be due and enforceable and
• the debts must be fixed by agreement or by a law or must be capable of being easily and promptly
proved.
If the requirements are met, set-off operates automatically and does not have to be raised or invoked by one
of the parties.
Merger
A person cannot be his own creditor or debtor. If the qualities or capacities of debtor and creditor concur in
the same person in respect of the same obligation, the obligation is extinguished. So, for example, if a lessee
of property acquires ownership of the property, the lease ceases to exist and he is no longer liable for rent.
Supervening impossibility of performance
If, once the contract has been entered into, it becomes physically or legally impossible for the debtor to
render his performance, he is excused from doing so.
Physical impossible of performance is judged according to the standard of reasonableness. For example, a
supplier of bricks would not be expected to deliver them by air, if this were the only means of transport
available.
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An obligation becomes legally impossible to execute, if the law ceases to
recognize or make provision for the performance in question.
The debtor cannot escape liability on the basis of supervening impossibility of performance if …
• He is himself responsible for the impossibility
• He expressly or tacitly guaranteed performance or
• He assumed the risk that performance might become impossible.
If the debtor is excused from rendering performance because of supervening impossibility, the creditor is
simultaneously discharged from liability to perform any reciprocal obligation resting on him.
Prescription
A debtor is not legally bound to perform in terms of an obligation which has prescribed. The Prescription Act
of 1969 states that a debt is extinguished after the lapse of that period of which applies to the type of debt in
question.
The periods of prescription of debts are the following:
• 30 years in respect of any debt secured by mortgage bond, any judgment debt, any debt in respect
of taxation or any debt owed to the State in respect of mining rights
• 15 years in respect of any debt owed to the State, arising out of an advance, loan or the sale or
lease of land
• 6 years in respect of a debt arising from a bill of exchange, other negotiable instrument or from a
notarial contract
• 3 years in respect of any other debt
If a debt qualifies in more than one of the categories, the longer period will apply and if a debtor pays his
'debt' after it has been extinguished by prescription, the payment is regarded as valid and the debtor is not
entitled to recover it.
Failure of creditor to perform reciprocal obligation
Where both parties to a contract undertake to render performances, the principal of reciprocity or
dependence of promises usually applies. One party is excused from performing his obligation until the other
has either performed or tendered to perform the obligation resting on him.
For example: In the case of a contract to perform a piece of work, the owner is not obliged to pay the
contractor until he has completed the work, (unless of cause the agreed otherwise).
Death
The death of a party is not an excuse for non-performance. The rights and obligations of the deceased
arising under a contract are transmitted to his estate which is administered by an executor.
However, if performance could have been only to the creditor himself, or only by the debtor himself, then the
death of the creditor or debtor, as the case may be, renders performance in terms of the contract impossible,
and hence discharges it.
Example 1
Joe hires Jimmy to represent him in a legal matter but dies halfway through the trial. - There is no one else
that Jimmy can render the performance to and so performance becomes impossible.
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Example 2
Joe hires Jimmy to represent him in a legal matter, but Jimmy dies halfway
through the trial. - If Joe hired Jimmy because of his expertise, performance would again become impossible,
but if Jimmy was part of a legal partnership and Joe didn’t care who represented him, the partnership would
not be discharged from its responsibilities just because if Jimmy’s death.
Insolvency
As a rule, the insolvency of a party is not, per se, an excuse for non-performance. The insolvent's trustee has
an election whether to abide by the contract or terminate it. If he adopts the former course, the trustee steps
into the shoes of the insolvent and must render full performance of the obligations due by the insolvent in
terms of the contract.
3.2 Forms of breach
Failure to perform (mora)
A debtor may fail to perform on or before the date fixed for performance. For example: the lessee of
premises may neglect to pay the rent by the stipulated date in the contract. It is said that the debtor is in
mora in respect of the obligation in question.
If no definite time for performance is agreed upon the debtor only fall into mora once the creditor has
demanded performance within a specified time, and the debtor has failed to perform within that time.
Incomplete or defective performance
The debtor may render performance on time but deviate from the performance required by the contract. For
example: the builder of a house may depart from the agreed specifications or use materials of inferior quality.
Repudiation
The debtor may repudiate his obligation by making it plain by his words or actions that he does not intend to
perform, or perform properly, in terms of the obligation. For example: the seller of an article informs the buyer
that he has decided to keep the article or to sell it to someone else.
Prevention of performance
The debtor may, by his conduct, put it beyond his power to perform. For example: a carrier of goods
carelessly causes their destruction in transit and so renders it impossible for him to deliver the goods at the
agreed destination.
3.3 Remedies for breach
Specific performance
A specific performance order is an order compelling the defaulter to perform what he has undertaken to do or
restraining him from carrying out what he has agreed not to do. (The latter order is called an interdict.)
The right to specific performance is not absolute and the court cannot grant specific performance if it is
impossible for the defaulter to perform. Even where the defaulter can carry out his performance, the court
has discretion to refuse an order of specific performance if this would produce a result which is inequitable or
contrary to public policy.
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Where the court refuses to order specific performance the innocent party may
recover the benefit of his bargain by means of damages.
Damages
An award of damages is an order to pay a sum of money for loss suffered. The primary rule for determining
contractual damages is that the innocent party may claim so as to be put in the economic position he would
have occupied if the contract had been properly performed.
He can recover the gains which he has not made and the actual loss which he has suffered as a result of the
contract not being performed or performed properly. He may recover damages on this basis whether he
cancels the contract on account of the breach or not.
To succeed with a claim for damages for breach of contract, the innocent party must establish that he has
suffered loss and that the loss was caused by the breach.
According to the principal concerning mitigation of loss, the sufferer cannot recover damages for loss which
he could reasonably have avoided. But the onus is on the defaulter to prove that the innocent party failed to
take the steps which a reasonable person would have taken in the circumstances to mitigate his loss.
Example
“Tony’s Tour Guides” has an agreement with “Mandy’s Marvelous Tours” to provide guides in accordance
with the tour packages that Mandy sells. In January Mandy sells a Gauteng tour package to ten German
tourist to be done in September. In April Tony informs Mandy that he plans to relocate his business to
Durban and will not be doing any more work in Gauteng from June onwards.
According to their agreement Tony must give her 6 months’ notice in such an event and so Tony is reach of
their agreement. Mandy cancels the tour in July and sues Tony for the full amount that she lost.
Even though Tony is in breach of their agreement and it is Mandy’s right to take legal action, she has a duty
to mitigate her loss. She had ample time to find another provider of tour guides or could have collaborated
with another tour operator.
Therefor it is unlikely that the court will award her the claim for the full amount of the loss suffered.
Cancellation (rescission)
Breach, no matter how serious, does not, per se, terminate the contract. This is so, even if the contract
contains a provision to the effect that, in the event of the default in question occurring, the contract will
become null and void.
It is only where the innocent party cancels the contract on account of the breach that it comes to an end. In
the absence of cancellation, each party remains liable to carry out or complete his respective performance
although, if the innocent party claims damages in lieu of performance, the defaulter is relieved of his duty to
perform.
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Penalty
To spare the creditor the difficulty and cost of proving a claim for damages, and
also to persuade the debtor to fulfil his part of the bargain, the creditor may insist that the contract includes a
clause to the effect that, if the debtor breaches his obligations, he will be liable to pay a sum of money or
render a performance to the creditor which he would not otherwise have had to pay or render.
For example, in a contract to erect a building, the owner may insert on a clause that, if the contractor fails to
complete the work by a stipulated date, he must pay R1 000-00 per day to the owner for every day that the
work remains unfinished after that date.
This type of provision is called a penalty stipulation, and the money or performance which must be paid or
rendered, a penalty. Penalty stipulations are governed by the Conventional Penalties Act of 1962.
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