Unit 6Pacta de Contrahendo

Learning outcomes:

Explain what is meant by the term pactum de contrahendo and distinguish this term form other forms of preliminary contracts.

Discuss the legal nature of the option contract.

List and discuss the requirements for an option contract.

Briefly discuss the breach of an option contract and the remedies available to a party who has suffered as a consequence of breach.

List examples of contracts of preference.

Briefly explain what is meant by the term “right of pre-emption”.

Discuss the requirements for a right of pre-emption.

Distinguish between options and rights of pre-emption.

Study:

Hutchison et al pp. 65-76.

Venter v Bircholtz Hirschowitz v Moolman Ficksburg Transport (Edms) Bpk

v Rautenbach De Jager v Burger Dettman v Goldfain

Pacta de contrahendo:

CONTRACT AIMED AT THE CONCLUSION OF ANOTHER CONTRACT.

Examples:

Option contract. Contract of preference.

Option contract: Restricts offeror’s capacity to revoke his offer.

Contract of preference:

Creates a preferential right for the conclusion of another type of contract, SHOULD THE OTHER PARTY DECIDE TO CONCLUDE SUCH A CONTRACT AT ALL.

It entails a right to insist on the co-operation of the other party towards the conclusion of another contract.

Parties have already reached consensus, but don’t wish to contract immediately.

Provide protection against later refusal to conclude contract.

Pacta de contrahendo must be distinguished from pre-contractual arrangements.

Pre-contractual arrangements No obligationary effect.

Includes:

Memoranda of understanding; Heads of agreement; Agreements in principle; Letters of intent.

Purpose of pre-contractual arrangements:

Promote trust, by demonstrating a commitment

on the part of the parties to the conclusion of a contract,

Or to place on record any progress achieved in negotiations.

review of progress made by attorneys,

Identifies outstanding issues, Provides basis for further progress

towards a binding agreement.

Consequences of arrangements depend on the interpretation of their terms in the context of their circumstances.

Corbett AR in Hirschowitz v Moolman:

“A pactum de contrahendo is simply an agreement to make a contract in future.”

Thus: Contract aimed at the conclusion of another contract.

Option contracts:

Legal Nature:

“A legal concept which comprises a contract between two parties, the OPTION GRANTOR and the OPTION HOLDER, to keep open an offer to contract.”

The contract that entrenches the substantive offer: Option contract.

Distinguish between option contract and substantive contract.

Option contract is NOT a substantive contract qualified by a suspensive condition.

Venter v Birscholtz:

Option contract is unique contract.

Dissected into offer to purchase accompanied by agreement to keep the offer standing for a specific period.

No suspensive condition exists. The exercising of the option does

not amount to the fulfilling of a suspensive condition.

Are any obligations created by the option contract?

Yes: option holder has the right that the option grantor will keep his/her substantive offer open for acceptance.

Option grantor has duty not to do anything to prevent option holder from creating a contract by acceptance.

Option holder receives a legally protected power to establish the substantive contract by exercising the option.

Requirements:

Must satisfy the requirements generally applicable to contracts, as well as:

1. Object of option must be clearly described.

2. Price/cost of object must be determined/determinable.

3. Manner of payment must be determined.

4. Period for exercising option must be determined.

Parties may agree on the manner in which the substantive offer must be accepted.

De Jager v Burger and Another:

FACTS:

Appellant granted an option to B for the purchase of her shares in certain immovable property.

B then nominated the respondents as option holders.

The option was granted for a period of 5 years concluding on the 31st of May 1992 at 06:00.

The final clause contained the following wording:

The option holder can exercise his option in writing by means of a written notice by prepaid registered post which must be sent before or on 31 March 1992. Such notice is the prescribed method of communication notwithstanding the fact that it might not have reached the party to whom it was addressed or did not come to his attention.

On the 30th of March 1992 the respondents signed a contract in terms of which they exercised their option, and delivered the signed document to the option grantor at 21:00 on 31 March 1992.

The appellant denied that the option was exercised timeously, and claimed the right to sell the property to a third party.

Respondent claimed that the word “can” in the last clause was indicative of the fact that the post of acceptance by means of prepaid registered post was not the only method of acceptance.

An equally efficacious method of acceptance could be utilised.

The respondents argued further that the method of acceptance they had uitilised (physical delivery) was in fact more effective than that stipulated in the final clause, and therefore served as as an effective and timeous conveyance of communication of acceptance.

Legal Question:

Was the method of acceptance utilised by the respondents acceptable, although it did not comply with the prescribed method of acceptance?

Decision:

1. There were two methods of acceptance prescribed by the contract:

1.1. Actual communication before 06:00 on 31 March 1992,

1.2. The posting of an acceptance letter by prepaid registered post before or on 31 March 1992.

2. If the respondents elected to utilise the second method, they had to do so in accordance with the final clause of the option, i.e. they had to post a prepaid registered letter.

3. Exercising of the option was not done timeously.

Ratio decidendi:

It was not open to the respondents to exercise the option physically after 06:00 on 31 March 1992.

Even if the exercised method was more efficacious than the posting of a registered letter.

Useful clauses to include in the option contract:

Restriction on transfer of option. Counter-performance for the

granting and holding of an option.

Clause prohibiting inheritance of the option.

Remedies for breach:

Regulated by general principles of law of contract.

Damages. Rescission.

Rights of preference:

1. Legal nature:

Contracts which create the following rights:

1.1. “Right of first refusal”: Preferential right to lease property.

1.2. “Right of pre-emption”: Preferential right to buy property”.

1.3. Preferential right created in a contract granting the buyer the right to sell something to a third party.

2. Rights of pre-emption:

A contract which creates a right of pre-emption does not place a duty on the grantor to sell the subject-matter of the right.

Should the grantor decide to sell, the holder of the right has a pre-emptive right to purchase the property.

“Trigger event” – Breytenbach v Stewart.

If the grantor of the right were to decide to sell his/her property, he/she has to make an offer of the holder of the right first.

The granting of a pre-emptive right limits the grantor’s capacity to sell his/her property to a third party.

Requirements for right of preference:

Contract wherein pre-emptive right is granted must comply with all the requirements of a valid contract in general.

Price at which property must be purchased may be mentioned or is objectively determinable.

Se problems regarding whether contract of preference should contain the essentialia of substantive contract.

Distinction: Options and Contracts of preference.

Option: Entails an offer to the grantee which may be accepted by the latter.

Contract of preference: No offer exists at the time of granting of the right of preference, and grantor is not obliged to make an offer unless and until he/she wishes to sell the property.

See study guide p. 57