One of the requirements for a valid contract is that the contract must subscribe to the principle of legality. Briefly, this entails the fact that when your contract is contrary to the common law or statute it is considered illegal and therefore does not meet the requirement of legality. The onus rests on the person who alleges that the contract is illegal – this is to enforce the principle of pacta servanda sunt (agreements must be kept).
In the law of contract, there are two forms of illegality: namely common law illegality and statutory illegality. Common law illegality is briefly defined as a contract that is contrary to public policy / good morals. Public policy / good morals are influenced by the public interests and are rooted in the Constitution of the Republic of South Africa, 1996 (‘the Constitution’) and specifically the Bill of Rights. There is no closed list of common law illegalities, but certain categories have developed over time and it may be important to note that new categories may emerge over time as public policy changes.
The first category is known as common law illegality affecting justice. The second category will be discussed in a subsequent article. There are certain sub-categories under this first category:
- A Pactum commissorium in a pledge entitles a creditor to keep the pledged object upon breach of contract by the debtor. The problem which arises in a pactum commissorium is that oftentimes the value of the property given as security is worth more than the actual debt which has been incurred by the debtor. For this reason, it would be contrary to public policy to allow the creditor to keep the property;
- Parate executie – this allows a creditor to realize the property of a debtor, which has been given as security without a court order. “Realize” in this sense can mean one of two things, firstly it can be where a creditor is already in possession of the debtor’s property in which case realize would mean to sell that property to extinguish the debt. A second meaning would be where an additional step would need to be taken and that is the clause that authorizes a creditor who does not have the property, two then seizing the property from the debtor so that he can sell the property by selling it. It is only void if it is contrary to public policy such as a clause that authorizes a creditor to conclusively determine that the debtor is guilty of breach – in this sense, the creditor is both player and referee or to have a clause in a contract which would limit or exclude a court’s jurisdiction – such a clause promotes self-help.
The above-mentioned information is the first part of a series of articles that will be written on the principle and requirement of legality in contracts and shows that contracts cannot be drafted as being too stringent on debtors, for example. However, the unfortunate practicalities do still exist with many contracting parties being taken advantage of while not knowing the applicable legal recourse available to them.
If you are in such a position or are unsure if your contract meets the requirement of legality, do not hesitate to contact us to assist you.