Must a contract be in writing to be binding?

Elements of a contract

·         A contract consists of an offer by the offeror (the seller or service provider) to the offeree (the buyer or client) to buy goods (movable or immovable) or services, for an agreed price or fee;

·         A contract becomes binding when the offeree accepts the offer;

·         Obviously, there must be agreement as to what is being offered;

·         There must be an intention to contract freely and voluntarily. Any misrepresentation by either party will render a contract void. Anyone who is coerced or bullied into signing a contract will have a defence of duress.

·         The person who wants to conclude a contract must also satisfy certain legal requirements:

o    He or she must have mental and contractual capacity. This means that the person must be sane and not under the influence of any drugs or alcohol which could affect his ability to fully appreciate what he is agreeing to;

o    He or she must be a major (18 years or older) unless his parents or guardian assist him;

Oral or written

As a rule, parties can do a deal with a handshake, or even orally.

However, in South Africa, there are a few contracts that must be written to be enforceable:

·         An agreement to sell immovable property (land, house or building);

·         Suretyship agreements, credit agreements, antenuptial (marriage) contracts, leases over ten years, and contracts for executionary donations (to be made later);

·         Wills.

Some contracts, both oral and in writing, may not be enforceable, e.g. if they are illegal, contra bonis mores (that means against public policy or norms) or impossible to perform.

Importance of written contracts

Why is it important to reduce a contract to writing, even if you don’t have to, in law?

·         It’s easier to prove the existence of a written contract;

·         Written contracts provide individuals and businesses with a legal document stating the expectations of both parties;

·         If a party breaches a term of the contract, the consequences of a breach and the remedies, are set out.

Contracts in business

·         Written contracts are for your protection;

·         A business contract states the terms and conditions of any business transaction, including product sales and delivery of services. This helps the parties involved avoid any type of misunderstanding that may arise, in the absence of a written contract;

·         If you use written contracts, it is far less likely that you will end up in court - your clients will be much more inclined to work with you to find a solution and work things out.;

·         If you have an oral agreement, you might forget some points that you have agreed on verbally, with the passage of time. But with a written agreement, all the terms and conditions are clear, and you can always amend the agreement with the consent of both the parties.

·         Companies also can use non-compete agreements to limit the type of services offered by former employees who have specific knowledge about the company’s specialized business services.

Termination of a contract

·         Some agreements terminate automatically after a fixed term (such as a property lease) or event (fixed term employment contract),

·         Parties to an agreement that carries on for an indeterminate period, can mutually end a contract if the business relationship has ended;

·         An oral contract can be terminated, verbally;

·         Parties should formally terminate a written contract, in writing.

·         If a party is in breach of a written contract (e.g. the goods sold are defective or the services provided, are poor), the other party has the remedies set out the contract, or at law (such as the Consumer Protection Act);

·         Some contracts require the one party to give the party in breach written notice to remedy the breach, before the first party can cancel.   

·         Termination will not affect any liabilities for breach of contract that occurred before the contract is ended.

Boilerplate arbitration clauses

Does your arbitration clause cover what you want it to cover?

In the case of North East Finance (Pty) Ltd vs Standard Bank of South Africa Ltd 2013 (5) SA 1(SCA) the Supreme Court of Appeal (SCA) made it clear that where an agreement has been brought about under fraudulent circumstances, and is therefore invalid, a clause that requires parties to refer any dispute between them to arbitration is also invalid. However, it is in principle possible to draft an arbitration clause in such a way that it will remain enforceable even where the agreement it forms part of turns out to be invalid.

North East Finance (North East) and Standard Bank (Bank) entered into a settlement agreement following disputes between them. An arbitration clause in the agreement stated that "in the event of any dispute of whatsoever nature arising between the parties (including any question as to the enforceability of this contract…), such dispute will be referred to arbitration…"

The Bank chose to walk away from the agreement after learning that North East had been defrauding it at the time the agreement was signed. North East then asked the Bank to attend pre-arbitration meetings, pursuant to the arbitration clause. The Bank refused, arguing that due to fraud, the arbitration clause was as invalid as the rest of the agreement. North East countered that since the arbitration clause specifically included the phrase "including any question as to the enforceability of the contract" it meant that the clause covered a dispute over allegations that the agreement was induced by fraud.

The SCA found that the agreement "did not have to be cancelled or rescinded: it was void". This meant that there was no question as to the agreement's enforceability and the arbitration clause therefore did not cover the dispute. Had the arbitration clause been drafted to provide that the scope of a dispute to be referred to arbitration included validity of the agreement and not merely enforceability, the outcome would have been different.

When a court is called to interpret an agreement, so the judgment goes, the court must find out what the parties to the agreement intended the contract to mean. The court found it to be clear that the Bank did not expect that there might have been fraudulent conduct by North East and therefore when concluding the agreement the Bank did not intend that the validity of the agreement or questions of fraudulent misrepresentation could ever have been matters to be arbitrated.

Finally, the SCA found that the agreement was probably induced by fraud with the result that the entire agreement, including the arbitration clause, was void. The Bank was therefore not obliged to submit the dispute surrounding the agreement's validity to arbitration.

A further reminder to make sure that the boilerplate clauses in an agreement say what you want them to say.