Contracts, negotiation and enforcement in South Africa

A Q&A guide to contracts, negotiation and enforcement in South Africa.

The Q&A gives a high level overview of the key legal concepts, including contract formation with general discussions as to authority, formal legal requirements, formalities for execution, the requirements for deeds and notarisation, and powers of attorney. It also considers the status of contractual terms, variation and assignment of contracts, and enforcement of the contract. The enforcement section covers remedies and liability, exclusion of liability, and cross-border/jurisdictional matters.

The Q&A is part of the global guide to contracts, negotiation and enforcement.

Nicholas Taitz, Knowles Husain Lindsay Inc
Contents

Formation of contracts

Authority and capacity

1. What are the authority/capacity rules for entering contracts, for different commercial entities?

In South Africa, in common with other jurisdictions, the most commonly used corporate vehicle is the company. Since the enactment of the Companies Act 1973, a party contracting with a company does not need to determine the contractual capacity of that company. In other words, a third party contracting with a company does not need to ascertain whether the company had capacity to enter into the contract under its memorandum of association. The current Companies Act 2008 maintains this position.

The Companies Act 2008 only applies to companies. Therefore, when contracting with other types of commercial entities, a party should examine the powers of the relevant entity under its constitutional documents. It is also advisable to take a warranty from a contracting party in relation to capacity and authority.

A statutory corporation has the capacity and powers conferred on it by the particular statute under which it was created.

To be valid, a contract with the state must be both:

  • Entered into in the ordinary or necessary course of government administration.

  • Authorised by the responsible minister.

Additionally, to be enforceable against the state, any payments that the contractor seeks to recover under the contract must be covered by, or referable to, a parliamentary grant for the class of service to which the contract relates. The relevant legislation in this regard is the State Liability Act No 20 of 1957.

Under South African law, the Master of the High Court takes charge of an insolvent estate until a provisional liquidator is appointed. A provisional liquidator has limited powers and is in effect appointed to secure the estate of the company or entity. A provisional liquidator wishing to sell assets or to continue with, or enter into, new contracts, must obtain the authority of the Master or of the High Court.

Once a final liquidator has been appointed at a meeting of the creditors of the entity in question, he or she has the right to sell assets or conclude contracts if authorised to do so by the creditors, which, in practice, is done by way of a resolution passed by a majority of creditors at a creditors' meeting.

Special rules apply to certain contracts (for example, lease agreements) under the Companies Act 2008 and the applicable provisions of the Insolvency Act. The function of the liquidator is essentially to control and administer the affairs of the company and to liquidate it.

Formal legal requirements

2. What are the essential requirements to create a legally enforceable contract?

Essentially, a contract is created in South African law based on the consent of the parties. Generally, a contract can be entered into through an offer and an acceptance. Consideration is not a requirement for a valid contract under South African law.

South African law recognises the distinction between an offer with the intention of being legally bound if accepted, and a mere invitation to participate in negotiations. The courts will evaluate whether a particular offer falls into one or the other category by reference to the intention of the party making the offer, as determined by the terms of the offer and its surrounding circumstances.

To constitute a legally binding offer that is capable of acceptance (resulting in a binding contract), an offer must be firm and complete. This means that the offer must:

  • Be made with the intention of being a binding offer.

  • Contain all the essential matters that need to be agreed on for the purposes of the contract in question.

An offer can be withdrawn at any time before acceptance. However, once an offer has been accepted, a legally binding contract will ensue and the offer cannot be withdrawn.

Both contracting parties must have the intention to enter into a binding and enforceable legal agreement. However, South African law recognises that there is a valid a contract where one party conducts itself so as to create in the mind of the other the reasonable apprehension that there is an agreement (even if there is no real agreement).

To be enforceable, any obligation or provision under a contract must be sufficiently certain. The South African courts will not enforce a provision that is unacceptably vague. The whole or part of a contract can therefore be void for vagueness.

In addition, to be enforceable, a contract must not offend the principles of public policy to which the courts adhere. An unlawful contract will not be enforceable, regardless of the consent of the parties.

 
3. What are the main forms of contract, for example in writing and oral?

Under South African law, certain essential requirements apply to specific types of contracts. The essential requirement common to all types of contracts is that there must be a meeting of the minds or a joint intention to enter into a legally enforceable agreement (see Question 2 ( www.practicallaw.com/w-006-3897) ).

It is not uncommon to incorporate terms by reference. This raises no legal difficulty, provided that it is done clearly and with sufficient certainty.

South African law does not generally impose any particular formalities to enter into a binding contract. A contract in electronic form can therefore be legally enforceable, provided that both:

  • There is adequate evidence of the parties' intention to be bound.

  • The parties agreed on the other essential elements of the contract.

The mechanism through which parties to a contract keep evidence and record their agreement is largely irrelevant under South African law, as the focus is on the intention of the parties as evidenced by their conduct. Evidence can therefore include any form of written agreement (whether paper-based or electronic). See also Question 9 ( www.practicallaw.com/w-006-3897) .

 
4. How are preliminary agreements used in your jurisdiction?

Preliminary agreements are commonly used in South Africa. The most common types of preliminary agreements are:

  • Non-disclosure and confidentiality agreements. Before engaging with one another, entities will typically enter into binding non-disclosure and confidentiality agreements, which may include non-circumvention provisions. Regardless of whether the contemplated transaction ensues, those preliminary agreements will be enforceable if they show an intention of the parties to enter into a legally binding agreement on sufficiently clear terms.

  • Heads of agreement or memoranda of understanding. In commercial transactions, it is not uncommon for the parties to enter into non-binding heads of agreement or memoranda of understanding. These should ideally provide for their non-binding nature (if so intended), to avoid any subsequent argument that the intention of the parties was to be bound by the heads of agreement or other similar document. In the absence of a clear provision on that issue, whether these agreements are binding will be determined by reference to the conduct of the parties, the terms of the agreement and the surrounding circumstances. The contents of heads of agreement or memoranda of understanding generally encompass the main terms and/or issues of the contemplated transaction. Usually, details are only dealt with in subsequent and binding transactional documents between the parties.

 
5. Can negotiations become legally binding in any circumstances? What are the principles and rules (if any) on pre-contractual liability and good faith in negotiations?

Negotiations can only give rise to legally binding obligations in circumstances where the parties have come to an agreement to be legally bound. There can be a binding agreement where one party conducts itself so as to create in the mind of the other the reasonable apprehension that there is a binding agreement, regardless of the lack of true consensus.

Parties are generally subject to a duty of good faith in contractual negotiations.

Formalities for execution

6. When are written contracts required and for which assets/interests?

Generally, South African law does not impose any formalities for the formation of commercial contracts. Commercial contracts are usually made in writing and signed by the parties, but this is for evidentiary purposes and is not required for the existence of the contract itself.

However, there are a number of important exceptions, including the following:

  • Where the parties to a contract agree on specific formalities for its conclusion or execution, these will be binding between the parties.

  • To have effect, any sale of land within South Africa must be contained in a deed of sale signed by the parties or their agents acting on their written authority (Alienation of Land Act 1981).

  • A donation concluded after the commencement of the General Law Amendment Act (that is, 22 June 1956) must be made in a written document signed by the donor, or by a person acting on written authority granted by the donor in the presence of two witnesses (General Law Amendment Act 1956).

  • A contract of suretyship, under which one party stands as surety for another person's legal obligations, must be embodied in a written document signed by or on behalf of the surety.

  • Certain learnership contracts (previously referred to as apprenticeship contracts) must be registered with the relevant sector education and training authority (section 17(3), Skills Development Act 1998). The form and contents of learnership agreements are prescribed by regulation 3 of Regulations GNR.330 of 3 April 2001.

  • An assignment of copyright must be in writing (Copyright Act 1978).

  • The sub-letting or assignment of a lease of a rural tenement requires the landlord's written consent (Article 9, Placaat of 1658).

  • Mining leases, servitudes over mining rights and prospecting contracts must be notarised (Mining Titles Registration Act).

  • A number of contracts require registration, with or without prior notarial execution, to convert the parties' personal contractual rights into real rights valid against third parties. Examples of those contracts include:

    • antenuptial contracts;

    • long leases;

    • mortgages;

    • special notarial bonds; and

    • assignments of patents.

In addition, certain commercial contracts are by custom made in writing, such as negotiable instruments and insurance policies.

 
7. Are there different formalities for different types of contractual document?
 
8. What are the formalities for the execution of documents by companies, foreign companies and individuals?

The same formalities apply for the execution of documents by companies, foreign companies or individuals. In all cases, the question will be whether the contracting parties have evidenced their intention to be bound by the contract, by means of signature or otherwise.

 
9. What is the status of electronic and faxed signatures in your jurisdiction?

Under the Electronic Communications and Transactions Act 2002, writing and signature requirements, whether imposed by statute or by the parties to a transaction, can generally be satisfied through electronic transactions.

The requirement that a document must be in writing is met if the document is both:

  • In the form of a data message.

  • Accessible in a manner usable for subsequent reference.

The Electronic Communications and Transactions Act 2002 differentiates between instances in which a signature is required by law and those in which it is required by the parties to a transaction. Where the signature is required by law, and that law does not specify the type of signature, the requirement is only met if an advanced electronic signature is used. Where signature is required by the parties to an electronic transaction and they have not agreed on the type of electronic signature, the requirement is met if both:

  • The parties use a method to identify the person and to indicate the person's approval of the information communicated.

  • Having regard to all the relevant circumstances at the time the method was used, the method was as reliable as was appropriate for the purposes for which the information was communicated.

Deeds

10. When are deeds required in relation to contracts?

In South Africa, deeds are only required for the registration of certain transactions relating to land. This is essentially a legacy from the English law system, which historically applied in South Africa.

Under the Deeds Registries Act 1937, the ownership of land can only be conveyed from one person to another by means of a deed of transfer, executed or attested by the Registrar of Deeds. Other real rights in land can only be conveyed from one person to another by means of a deed of cession, attested by a notary public and registered with the Registrar of Deeds (section 16, Deeds Registries Act 1937).

A deed is executed by a conveyancer (or the owner of the land) in the presence of the Registrar of Deeds and attested by the Registrar. Registration takes place on the affixing of the Registrar's signature to the deed.

 
11. What are the legal formalities for a deed?
 
12. What are the legal requirements for the execution of deeds?

Notarisation

13. Is notarisation required for contracts in your jurisdiction?

Generally, notarisation is not required for contracts in South Africa.

However, the following contracts require notarisation:

  • An antenuptial contract executed in South Africa, which must be attested by a notary and be registered with the Registrar of Deeds within three months from the date of execution, unless that period is extended by a court on application.

  • A bond over movable property (that is, a form of a security), which must be attested by a notary public.

South African law also recognises notarial deeds, which are deeds drafted and attested to by a notary public. Notarial deeds must be distinguished from signed documents that are simply authenticated by a notary public and from copies of document that are certified as correct by a notary public.

Notary fees vary. Many notaries charge on their usual hourly rate, while others charge a fixed fee. In practice, fees range between ZAR600 to ZAR1600 per document. However, fees may be higher if more time is taken up in the process.

 
14. What are the legalisation requirements in your jurisdiction and how is it carried out?

South Africa is a party to the HCCH Convention Abolishing the Requirement of Legalisation for Foreign Public Documents 1961 (Apostille Convention). The Apostille Convention applies to foreign public documents for use in South Africa, provided that the documents come from a country that is a party to the Convention.

To be used in the High Court of South Africa, foreign documents must be authenticated (rule 63, Uniform Rules of Court). A document will be considered to have been duly authenticated if it bears the signature and seal of any of the following (rule 63, Uniform Rules of Court):

  • The head of a South African diplomatic or consular mission, or similar official.

  • A consul-general, consul, vice-consul or consular agent of the UK or any other similar UK official.

  • Any government authority of the foreign country that is responsible for the authentication of documents under the law of that country.

  • Any person in the foreign country who can be authorised to authenticate a document under a certificate issued by any of the persons referred to above, in accordance with the law of that country.

  • A notary public in the UK, Zimbabwe, Lesotho, Botswana or Swaziland.

  • A commissioned officer of the South African Defence Force as defined in section 1 of the Defence Act 1957, in the case of a document executed by any person on active service.

Powers of attorney

15. What are the main types of powers of attorney in your jurisdiction?

Under South African law, powers of attorney are a mechanism by which one person can exercise the legal rights and entitlements of another as their attorney (that is, a form of agency).

A power of attorney can be general or special. A general power of attorney has a general scope, and gives the attorney all the legal rights and powers of the grantor. By contrast, a special power of attorney is limited in scope. A special power of attorney is given for a specified purpose and only entitles the attorney to exercise certain defined rights of the grantor, and not others.

South African law does not recognise powers of attorney that continue after the death of the grantor. A power of attorney will immediately lapse on the death of the grantor.

 
16. What are the main transactions when powers of attorney are used?

Generally, a power of attorney is used where the grantor (either an individual or a corporate entity) cannot exercise the powers in question themselves for any practical reasons.

Powers of attorney are used in a number of contexts on a regular basis, including for the purposes of completion meetings and the execution of documents where the grantor is not available.

 
17. What are the key provisions in a power of attorney?

A power of attorney must comply with the following essential requirements:

  • The attorney must be precisely identified and must accept their appointment as attorney.

  • The scope of the power of attorney must be clearly defined, whether special or general.

 
18. What are the formalities for the execution of a power of attorney?

Subject to certain exceptions, there are no formalities for granting a power of attorney. A power of attorney can be made in any manner in which one person can declare their will to another person, that is, in oral, in writing, in sign language or any other manner having the effect of articulated words.

Usually, a power of attorney is a declaration in writing by one person that another person will have the power to perform on their behalf the acts that are set out in the declaration.

Although there are no formalities for the execution of a power of attorney, certain formalities apply to powers of attorney to be used in specific circumstances, including:

  • Transfers of land.

  • Civil proceedings.

Other

19. Is virtual closing used in your jurisdiction?

Virtual closing is used in South Africa. South African law recognises contracts executed in counterpart, by means of separate signature pages if appropriate. The signature of a document only serves as evidence of the agreement between the signatory parties. Whether a document is signed in counterpart or by means of an electronic signature is not relevant under South African law. However, certain requirements apply for the admission in civil proceedings of documents using electronic signatures (see Question 9 ( www.practicallaw.com/w-006-3897) ).

 
20. How are legal opinions obtained and used in your jurisdiction?

Legal opinions are generally obtained from attorneys (equivalent to solicitors in the English system) or from advocates (equivalent to barristers in the English system). While legal opinions can relate to any matter of law, in the context of commercial transactions, it is usual to obtain an opinion confirming that a South African legal entity involved in a transaction acted with the requisite capacity and authority. This type of opinion is usually obtained from attorneys rather than advocates.

In a transaction between a South African company and overseas entities, it is not uncommon to seek legal opinions from foreign attorneys confirming the capacity and authority of the foreign parties.

 
21. What are the key issues in the conduct of completion meetings?

For completion meetings, it is essential to ensure that the parties are both:

  • Aware of the legal obligations they are undertaking.

  • Appropriately authorised to undertake those obligations.

If a South African company is contracting, the authorisation will normally take the form of a resolution of the board of directors.

Transfer arrangements post-completion commonly include the holding of funds in escrow, usually in an attorney's trust account.

The use of conditions precedent is common. The two main categories of conditions are:

  • Suspensive conditions, which suspend the operation of a contract until the conditions are fulfilled.

  • Resolutive conditions, which will cause the contract to come to an end when the conditions are fulfilled.

 

Content of contracts

22. What is the legal status of contractual terms in your jurisdiction?

South African contract law is based on the principle of consensus. Therefore the terms of a contract depend on the intention of the parties to the contract.

Where there is a written contract, a court will mostly have regard to the express terms of the contract. However, these are not the only terms that can be found to form part of the contract. South African law recognises the following non-express terms:

  • Tacit terms. These are terms not expressly recorded in the contract (in the case of a written contract) or not said between the parties (in the case of an oral contract), but which each party intended to agree on.

  • Implied terms. These are terms implied into a contract regardless of whether the parties intended them to be part of the contract. Terms can be implied under the legislation or at common law.

  • Trade usages. These are terms implied into a contract in specific trade scenarios. Where a term is especially usual in a specific context, a court will find it to be part of the contract.

The status of contractual terms (whether express, implied, tacit or arising from trade usages) has no effect on legal remedies under South African law.

 
23. Are warranties recognised in your jurisdiction?

Warranties are recognised in South Africa. They are common in various types of commercial transactions, in particular in sales of business, sales of shares and other corporate transactions.

 

Variation and assignment

24. What are the main ways to transfer contractual rights?

Under South African law, contractual rights can be transferred, essentially by means of assignment and cession.

However, it is not possible to assign contractual rights where a party contracted in consideration of the particular qualities/identity of the other party (delectus personae). A court will need to consider in any particular case whether the intention of the parties was to engage in a contractual relationship with a particular party only, or whether the intention of the parties was to allow the free assignment of the contract to a third party.

 
25. What are the rules relating to waiver of contractual rights?

Under the principle of consensus, the waiver of contractual rights is governed by the intention of the parties. In other words, a party can generally waive its contractual rights if it indicates its intention to do so. If the contract provides for methods of waiver (for example, in writing and signed by the waiving party), the waiver will only be effective if it complies with those formalities.

 

Enforcement

Liability and remedies

26. What are the rules relating to invalidity, misrepresentation and mistake relating to contracts?

The South African courts will generally uphold contractual terms agreed on by the parties, provided that they are not invalid. A term can be invalid if it is against either:

  • Good morals or public policy.

  • The South African Constitution (for example, if it is unfairly discriminatory or impinges on constitutional rights in some other manner).

A misrepresentation inducing a party to enter into a contract will allow that party to resile from the contract. A misrepresentation can be fraudulent, negligent or innocent and in any case entitles the innocent party to cancel the contract, provided that the misrepresentation was material.

As South African contract law is based on the principle of consensus, if one or both parties make a material mistake relating to a contract, this will entitle one or the other to resile from the contract. A mistake can be mutual or unilateral. In the case of a unilateral mistake, the party making the mistake must have acted reasonably to be entitled to cancel the contract on the basis of that mistake.

 
27. What are the main performance and discharge rules relating to contracts?

Generally, a party must perform its obligations as stipulated in the contract. If one party does not perform its contractual obligations, the innocent party can give notice of the breach to the other party and require that party to remedy the breach, failing which the contract will be cancelled.

The contract can include provisions on breach, including notice of breach and the period during which the breach must be remedied. If the contract is silent, the common law requires the innocent party to give reasonable notice to the other party to remedy the breach before it can cancel the contract.

Parties are generally free to discharge a contract by agreement.

The effect of force majeure and frustration is governed by the provisions of the contract. If the contract is silent, the principle under South African law is that the parties have no legal obligation to do that which is not possible. Therefore, force majeure or frustration will limit the scope of a party's duty to perform the contract.

 
28. What are the key rules on privity of contract and third party rights?

The basic rule is that only parties to a contract can acquire rights under the contract or be sued under the contract. A third party attempting to sue under a contract will have no cause of action, except if the contract was for the benefit of that third party.

Under South African law, a contract can be entered into for the benefit of a third party. In that case, the third party can acquire rights under the contract and can enforce those rights against the contracting parties, even if it is not a contracting party.

 
29. What are the main rules relating to contractual liability?

Generally, under the doctrine of privity of contract, only parties to a contract can be liable under that contract (see Question 28 ( www.practicallaw.com/w-006-3897) ).

If a party breaches a contract, the other party can choose to either:

  • Hold the first party to the contract and insist on performance (specific performance).

  • Cancel the contract and claim damages.

Damages for contractual breach are calculated to compensate the innocent party for losses suffered and to place them in the position they would have been in had the contract been properly performed.

In accordance with the general principle that an ambiguous contract will be interpreted so as to impose the least burden on the debtor, co-debtors are jointly liable unless the contract provides otherwise.

The presumption that liability is joint, rather than joint and several, is a strong presumption. It applies even when the co-debtors are associated in a committee, or joint venture, falling short of a partnership. The presumption does not apply to:

  • Ordinary partners, who are jointly and severally liable for the partnership's contracts.

  • Co-parties to negotiable instruments.

A joint debtor who has paid his or her share is discharged from liability, regardless of the fate of the other joint debtors. A joint debtor can protect himself or herself from liability for non-performance by tendering payment of his or her share.

Partners, co-parties to negotiable instruments and those on whom the contract clearly, by express words or necessary implication, imposes liability in solidum are jointly and severally liable. Joint and several liability can also be imposed by statute. Each party is liable to the creditor for the full amount of the debt, and the creditor can, at his or her option claim, the full debt or any lesser amount from any of them.

 
30. What are the main rules relating to excluding contractual liability?

Generally, South African law recognises exclusions of contractual liability, subject to the following exceptions:

  • Liability for fraud cannot be excluded.

  • Contractual exclusions of liability that are against good morals or offend the principles of the Constitution will not be upheld.

The South African courts have consistently upheld exclusions of liability for gross negligence. Those are not regarded as being against good morals or as offending the Constitution. However, this does not extend to exclusions of liability for fraud.

 
31. What are the main contractual remedies?

In the event of a breach, the innocent party can choose to either:

  • Hold the other party to the contract and demand specific performance.

  • Cancel the contract and claim damages.

If the innocent party cancels the contract and claims damages, the courts will award damages for losses actually sustained by the innocent party, to place the innocent party in the position they would have been in had the contract been properly performed.

On application by a party, a court can rectify mistakes in a contract, provided that the court is satisfied that the contract in its written form does not reflect the common and continuing intention of all the parties. In that case, the court will rectify the terms of the contract to reflect the true intention of the parties.

A party can apply to the court for an interdict ordering another party not to breach a term of the agreement. The party applying for this relief must show both that:

  • It has a clear right under the contract.

  • It would suffer harm if the term was breached.

 
32. What are the main differences between indemnity and damages? Are penalty clauses subject to any limitation?

Generally, an indemnity will provide more effective cover to an innocent party than a claim in damages, although in many cases the amounts claimable under an indemnity and contractual damages will overlap. South African law contains limitations relating to the extent and type of damages that can be claimed in specific circumstances.

The Conventional Penalties Act 1962 limits the amount of contractual penalties and empowers a court to reduce a penalty to the extent that it considers it equitable in the circumstances. This will be determined on a case-by-case basis. The essential test that the courts must apply under this Act is whether the penalty is proportionate to the breach in question.

 

Enforcement and cross-borders issues

Choice of law

33. Is a foreign choice of law in a contract upheld by the local courts?

The local courts will uphold a foreign choice of law in a contract, provided that the law does not offend the basic principles of the South African Constitution (essentially principles under the Bill of Rights and those relating to issues of natural justice).

 
34. Are any mandatory terms implied by statute?

South African legislation contains a number of provisions importing terms into contractual arrangements. Additionally, terms can be implied into a contract as a result of the application of the common law.

Jurisdiction

35. Is a choice of jurisdiction in a contract upheld by the local courts?

The local courts will generally uphold a choice of jurisdiction in a contract, provided that there is a link between the territory in which the foreign court operates and the residence of the parties or the facts that gave rise to the dispute.

Enforcement of foreign judgments

36. When are foreign judgments recognised in your jurisdiction?

A foreign judgment is not directly enforceable in South Africa. To be recognised in South Africa, a foreign judgment must be pronounced by a proper court of law and meet certain requirements. An application for recognition must be made to the High Court of South Africa.

A foreign judgment that meets the requirements for recognition can be the basis of a defence of res judicata (that is, the doctrine that prevents a party from re-litigating any claim or defence already litigated and adjudicated). In addition, an authenticated foreign judgment constitutes a cause of action and is enforceable through an ordinary action before a South African court.

 

Contributor profile

Nicholas Taitz

Knowles Husain Lindsay Inc

T +27 11 669 6000
F +27 11 669 6299
E NDT@khl.co.za
W www.khl.co.za

Professional qualifications. South Africa, Attorney (High Court)

Areas of practice. Regulatory advice and litigation; general commercial litigation and dispute resolution; competition (anti-trust) litigation.

Non-professional qualifications. BA (Hons Philosophy), LLB, University of the Witwatersrand

Recent cases

  • Acting successfully for the South African Reserve Bank in the matter of Shuttleworth v SARB and others.

  • Acting for the Competition Commission of South Africa in the excessive pricing case against Sasol Chemical Industries.

  • Acting generally for the largest medical scheme in South Africa, Discovery Health, on a range of matters of a regulatory nature. Acting in the same vein for Profmed Medical Scheme.

  • Acting for Total South Africa in a wide range of litigious matters pertaining to the fuel industry.

Languages. English

Professional associations/memberships. Law Society of the Northern Provinces, Member.

Publications. Numerous articles for various national newspapers, De Rebus, Without Prejudice and The Daily Maverick.

 
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