Concept of legality in contracts

23 Feb, 2024 - 00:02 0 Views
Concept of legality in contracts

eBusiness Weekly

Arthur Marara

Daily, contracts are entered into, whether written or unwritten. A contract has to comply with the provisions of the law for it to be enforceable. In other words, it has to be a legal agreement.

An agreement that violates the law is deemed illegal, void and unenforceable. There are no rights that ensue from an illegal agreement. The duty of the court is to uphold the law.

J.T.R. Gibson gives a detailed definition of what a contract is: “A contract is a lawful agreement, made by two or more persons within the limits of their contractual capacity, with the serious intention of creating a legal obligation, communicating such intention, without vagueness, each to the other and being of the same mind as to the subject matter, to perform positive or negative acts, which are possible of performance.”

The key phrase is “lawful agreement”. This means you can satisfy all the other elements, but if your agreement is illegal, it is unenforceable.

Many corporates usually find themselves in difficult times after entering into agreements that are illegal. You need to ensure that your legal team properly advises you before entering into any agreement. This can save you lots of resources in the long run.

Types of illegality

What is the source of illegality? This is the question that comes to mind quickly. Illegality comes in two forms

Statutory illegality — This is caused by contravention of a statute (statutory illegality).

Common law illegality — This is caused by contravention of the common law (common law illegality).

Statutory illegality

A statute may expressly prohibit a certain type of contract and declare such a contract void, invalid or of no force or effect. Such a contract is unenforceable. A statute may also expressly prohibit a certain type of contract but make no express provision about its validity. In such cases, the court usually looks at the intention of the legislature to determine validity or otherwise. The intention can be gleaned from:

(a) use of peremptory terms

(b) use of discretionary terms and

(c) whether declaring a contract illegal solves the mischief that the statute seeks to prevent.

I will deal with statutory illegality in greater detail in one of the coming instalments.

Common law illegality

This arises if the agreement is in violation of the common law or public policy (community interests or public morality, social or economic expedience). The common law recognises a series of these contracts.

The first category relates to contracts intended to injure the state or public service, for example, trading with the enemy and corruption are affected by common law illegality.

The other category relates to contracts injurious to the administration of justice, for example, ousting the jurisdiction of the court, collusion, contracts injurious to the institution of marriage, contracts to defraud creditors, and pactum successorium (a contract that curtails freedom of testation by promising to bequeath property to a third party).

There are more contracts that are in contravention of the common law.

Pactum commissorium

This is a contract where one borrows money from another, pledges property as security for repayment of the debt and agrees that in the event of default, the creditor can take full ownership of the pledged property without a court order.

The essence of a pactum commissorium is permitting automatic appropriation by the creditor of the item pledged or mortgaged on failure by the debtor to pay the principal obligation.

Many companies, especially some unethical microfinance institutions, have been guilty of such practices in the past. Even if you agreed on automatic appropriation, the law says that is illegal.

The case of Chimutanda Motor Spares (Pvt) Ltd v Musare and Another, 1994 (D) ZLR 310 (H) defines a pactum commissorium as “a pact by which the parties agree that if the debtor does not within a certain time release the thing given in pledge by paying the entire debt, after the lapse of the time fixed, the full property in the thing will irrevocably pass to the creditor in payment of the debt”. (See van Rensberg v Weiblen 1916 O PD 247 at 252)

There are two requisites that have to be shown to demonstrate that an agreement is a pactum commissoriu.

There should be a pledge, mortgage of property by way of security for the payment of the principal obligation.

Stipulation for the automatic appropriation of the property in favour of the creditor on default by the debtor/pledger.

Wille’s “Principles of South African Law”, 8th edition, page 345, establishes that a valid pledge merely confers the right to retain possession of the item pledged as security by the pledgee as long as the debt remains unpaid, it does not confer the right of ownership. The pledgor retains ownership of the pledged property.

The law places a duty of care on the pledgee over the pledged property. In the event of loss or damage while the property is under his custody or possession, there is a presumption of negligence against the pledgee. Thus, the pledgee is accountable to the pledgor for such loss or damage to the pledged property.

In addition, the pledgee is obliged to render an account to the pledgor of all fruits and profits actually derived from the pledged property. He must pay these to the pledgee or set off in a reduction of the debt.

In the event of default to pay by the set date, the pledgee has no recourse to self-help. He has no right to sell the pledged property without recourse to law.

The procedure which the pledgee must follow for redress is outlined on page 349 of Wille’s “Principles of South African Law” (supra) where he states: “A judgment for the debt secured may be obtained by the mortgagee (pledgee) if the mortgagor (pledgor) fails to repay the debt at the due date or if he commits a breach of any express clause of the mortgage contract which entitles the mortgagee to foreclose.

“The judgment of the court declares that the specifically mortgaged property may be executed upon and the property is subsequently sold in execution of the judgment by the officer of the court who pays the mortgagee the amount of his judgment from the proceeds of the sale.

“A mortgagee is not entitled to sell the mortgaged property without recourse to law.”

The position of the law is that a pactum commissorium is illegal and unenforceable (See Oceaner (Pvt) Ltd and Ano v Upperclass Enterprises (Pvt) Ltd and Anor 2001 (2) ZLR 130 (h)).

The reasons our law renders a pactum commissorium illegal are many and varied. The chief reason, however, was to do with public policy considerations.

Our courts will certainly not give effect to agreements that are contrary to public policy, exploitative and oppressive. In Kufandirori v Chipuriro and Ors 2004 (1) ZLR 74, Bhunu J (as he then was) emphasised that the creditor cannot take ownership without a court order. This was to prevent parties from taking the law into their own hands.

There have also been instances where many people were led into signing off their immovable properties as security for debts. In reality, what they were signing were post-dated agreements that would take effect once they defaulted on payment of the obligations. In some instances, others would even be made to sign transfer papers which are also post-dated.

A number of people lost their property through this route. Do not engage in any arrangement without consulting your attorney as you may end up suffering incalculable losses. We will look at another form of common law illegality next week, and the consequences of illegality.

LEGAL DISCLAIMER: The material contained in this article is set out in good faith for general guidance in the spirit of raising legal awareness on topical issues that affect most people on a daily basis. They are not meant to create an attorney-client relationship or constitute solicitation. No liability can be accepted for loss or expense incurred as a result of relying in particular circumstances on statements made in the article/post. Laws and regulations are complex and liable to change, and readers should check the current position with the relevant authorities before making personal arrangements.

Arthur Marara

Arthur Marara is a corporate law attorney practising law in Harare. He is also a notary public and conveyancer. He is also passionate about labour law, commercial, and family law and promoting legal awareness and access to justice. He writes in his personal capacity. You can follow him on social media (Facebook Attorney Arthur Marara), or WhatsApp him on +26378005515

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