This article was first published in the 1st quarter 2018 edition of Personal Finance magazine.
The essence of a contract is simple: an offer is made and accepted, with the intention of one thing of value being exchanged for another. There are few rules: neighbours might agree over the fence to erect a security camera and share the cost; a medical practitioner might give you an appointment subject to payment if you fail to cancel 24 hours in advance, or you might click “Confirm” on a website in the expectation of receiving the holiday accommodation you choose.
So what makes an agreement binding and enforceable, even if there is no written and signed agreement? And what recourse do you have if the other party doesn’t meet his or her obligations?
Trudie Broekmann, a Cape Town attorney who specialises in consumer law, lists the following basic requirements of all legal contracts, whether the agreement resides in the minds of the parties or is carved in stone. In most cases, the only difference between an informal and a formal agreement is that the latter is much easier to prove.
- To be valid, the offer must be clear and cover all the essential and material terms of the offer. If it is too vague, neither party can be expected to enforce it. A tentative statement is not an offer – for example: “I could possibly do the job for 10 percent less, but I’ll have to think about it”. The person making the offer must have the clear intention to do so – for example, an advertisement can be an offer, but it can also be just an invitation to do business. Some offers have a limited term, and you cannot accept an offer that has already lapsed.
- Acceptance of the offer must be clear and unambiguous. If the person responding to the offer communicates that he or she agrees with some parts of the offer, but suggests amendments, there is a counter-offer, not acceptance. The person who made the first offer can then decide whether he or she wants to accept the counter-offer.
- The parties must be legally competent to enter into a contract – for example, they must be 18 or older (unless they are emancipated minors, usually the result of marriage). There must be consensus on the agreement, and it must be reached freely, so neither party is acting under duress – for example, under threat of repercussions if they don’t conclude the contract – or has been misled as to the contents of the contract.
- Performance in terms of the contract must be possible. If an offer is made, but the recipient dies before he or she can accept it, there is no contract, and there can be no consequences – for the estate, for example.
- The contract must not be illegal. Contracts that deal in stolen goods, certain restraint-of-trade clauses and contracts designed to ensure the payment of gambling debts are examples of illegal contracts. If a lease agreement prohibits a tenant from sub-letting a property and the tenant enters into a lease with a sub-tenant, the sub-lease is illegal and invalid.
However, five contract types are required by law to be concluded in the traditional way, says Broekmann. “They must be written out or printed/typed on paper, and both parties, or their representatives, must sign them,” she says. These are:
- The sale of immovable property (land/buildings);
- Wills and codicils;
- Contracts that require stamp duty to be paid;
- Bills of exchange; and
- Contracts whereby the parties agree that certain formalities must be met before a contract arises. For example, a Cape Town resident agrees to supply his neighbour with borehole water in the event of water restrictions reaching a certain level. Such a contract could specify that a council official must sign a letter confirming the level of water restrictions before the contract becomes legally binding.
So much for the overall principles of contract law. But how do they apply to electronic means of communication: emails, SMSes, Facebook posts, WhatsApp messages, and so on? What happens if you receive an offer in informal language in an SMS and you accept it the same way? Can either party be bound by such an agreement? Where and when exactly did the contract come into being? And what happens if an electronic message is sent in good faith, but not received because of a glitch in the transmission?
Despite the widespread use of electronic communication by businesses and individuals, it is surprisingly difficult to find clear, concise guidelines to the significance of making and accepting offers online and amending and cancelling such agreements. Case law is relatively limited, but one significant judgment in the Labour Court in 2008 established once and for all that electronic messaging is as valid a way of transacting as any other, as long as the ingredients of a contract are clearly and unambiguously present.
The case of Jafta v Ezemvelo KZN Wildlife involved a job offer emailed to Mr Jafta by the human resources department of KZN Wildlife. Jafta was on holiday when he received it and had to resort to emailing his reply from an internet café. As far as Wildlife was concerned, the email never arrived, prompting an urgent SMS to Jafta asking for a reply by a certain date. Jafta responded by SMS, saying he had already replied “in the affirmative” by email. However, Wildlife failed to note the word “affirmative” and took from the message only the assurance that an email response had been sent. When the email was not found, Wildlife concluded that Jafta had failed to accept the job and retracted the offer.
The Labour Court’s judgment outlines the issues as follows:
- Was the content of Jafta’s email an acceptance of Wildlife’s offer of employment?
- Was the content of Jafta’s SMS an acceptance of Wildlife’s offer of employment?
- Is an SMS a proper mode of communicating acceptance of an offer?
- If Wildlife did receive an acceptance of the offer and a valid contract of employment came into existence, what are Jafta’s damages arising from Wildlife’s repudiation?
After exhaustive consideration of various factors and a review of case law in other countries, the court found, in summary, that:
- Jafta had not communicated acceptance of the job offer by email, because an investigation showed that the email (although it had been sent) had never been received.
- However, Jafta had communicated his acceptance via SMS, which the court found to be “as effective a mode of communication as an email or a written document”. The message had referred to an “affirmative” in respect of the job offer, even though Wildlife failed to pick up on that part of the message. Therefore, a contract of employment did indeed come into existence.
- As Wildlife repudiated the contract by denying receipt of Jafta’s acceptance, its repudiation was unlawful and Jafta was entitled to damages.
In an article published on the website of SME South Africa (smesouthafrica.co.za/16544: “What you need to know about contracting online”), Johannesburg attorney Monisha Prem, the chief executive of M Prem Inc., advises businesses to take note of the miscommunication and misunderstanding of the issues in this case and make staff aware of the risks and consequences of emails and SMSes. Clearly, that is good advice for consumers too.
Prem explains that the passing of the Electronic Communications and Transactions Act (ECTA) in 2002 established the basic premise that digital communications are no less valid than paper-based communications. Section 11(1) of the ECTA put it like this: “Information is not without legal force and effect merely on the grounds that it is wholly or partly in the form of a data message.”
“Therefore it is now possible to contract by means of data messages, and parties may sign agreements using digital signatures if they wish,” she says.
The ECTA defines four types of electronic contracts, says Broekmann:
- Where the parties negotiate and agree on contractual terms by data message, such as email or SMS. One party makes an offer and if the other party unequivocally accepts it, it is binding.
- Where you contract with a supplier on its website. The website sets out the supplier’s offer. If the consumer clicks on “Buy” or “Accept”, or any other button that demonstrated intent to accept the offer, there is a valid contract, and the consumer is bound.
- Where businesses exchange data via an EDI (electronic data interchange) agreement. This is a paperless, computer-to-computer means of managing the exchange of documents swiftly and efficiently. In other words, it removes the need to use post, fax or email, all of which require the intervention of people, which can slow things down and introduce the risk of error.
- Where people are chatting in a chat room when a clear offer is made and clearly accepted.
There are also contracts entered into via telephone, Skype, Facetime, or any one of many messaging systems, such as direct messaging on Facebook and WhatsApp. If there is an offer and acceptance between people with contractual capacity, such contracts are binding, says Broekmann.
It sounds straightforward, but what about an offer made by data message and responded to with, instead of text, a smiley face? Johannes du Plessis, a legal adviser to insurance broker Risk Benefit Solutions, told Times Live that “seemingly innocent emoticons in an instant message or email could potentially lead to you being bound by unwanted contracts and held liable for damages”.
He cited the example of lease negotiations during which an instant-message user sent a smiley face, a bottle of champagne and dancing figures to a landlord who was advertising a property for rent. “As a result, the landlord removed his online ad. The court stated that these emoticons conveyed to the landlord that everything was in order and that the message was misleading. The sender was subsequently ordered to compensate the landlord for his loss of prospective rental income,” he said.
The implication of this is clear,” he said. “Do not put yourself at risk by communicating in any way that could create an incorrect impression or belief in the mind of the receiver that a legal contract has been concluded.”
Where and when
In a dispute, it might be important to know where and when a contract was concluded, says Broekmann. If it is a cross-border contract, the “where” is critical, because it establishes which legal system has jurisdiction, she says.
“According to section 22(2) of the ECTA, the contract is concluded where and when the offeror receives acceptance of the offer. If, for example, the offeree sends the offeror an email to accept the offer, the contract is regarded as having been concluded wherever the server that receives the email is located. Consequently, for example, many large businesses make sure their servers are based in tax havens (for example, Mauritius, Bermuda and the Netherlands) to avoid having to pay tax in the country where their offices are located.”
The “when” is determined by the time when the email of acceptance arrived in the offeror’s email account. However, Prem points out that “the acceptance of the offer does not have to come to the knowledge of the offeror for a contract to arise”. This ensures that the offeree cannot be disadvantaged by not knowing when the offeror knew about the acceptance, she says.
This is critically important to the buyer of goods in an online transaction. “When the buyer clicks on ‘I accept’, ‘I agree’, or ‘Buy’ on a website offering goods for sale, a contract is concluded,” writes Prem. “However, this acceptance of the offer may not come to the attention of the seller if the thing sold is packaged and delivered automatically, or through a dispatch service.
“Therefore, an email or SMS will be regarded as having been received even if the addressee has no knowledge of it being in his inbox. The data message merely has to be capable of being retrieved.” Referring back to Jafta v Wildlife, Jafta’s email acceptance of the job was not valid, because it was not “capable of being retrieved”. Investigations proved that it never arrived in Wildlife’s inbox.
Signatures are such an everyday requirement and their significance is so well understood that few people question it when required to use one to verify an agreement, from a million-rand property purchase to an indemnity form for the local school (about which more later). So it is a giant leap to realise that your name at the end of an email, or your tick in a box accepting a website’s terms and conditions, might carry the weight of a signature in the event of a dispute over an electronic contract. In terms of the ECTA, a digital signature is defined as “data attached to, incorporated in, or logically associated with other data and … intended by the user to serve as a signature”.
When an authenticated signature is required by law, there is such a thing as an “advanced electronic signature”, which is a technical device produced by an accredited provider, but, in the ordinary scheme of things, a data message has legal force in terms of the ECTA without anything resembling a traditional signature as long as there is clear evidence of the sender’s intentions.
This was demonstrated in the case of Spring Forest v Willberry (Pty) Ltd before the Supreme Court of Appeal (SCA) in 2015, says Shmuel Moch, an attorney at law firm Adams & Adams in Pretoria. Two companies were in dispute over whether or not the cancellation of certain contracts by email was valid, given that they contained clauses specifically stating that any cancellation must be in writing and signed by both parties. The cancellation had been agreed verbally and the financial terms of the cancellation had been confirmed in an email chain, with the names of the representatives printed at the foot of their respective emails. Believing the cancellation had been concluded, Spring Forest signed a replacement contract, prompting Willberry to seek an interdict to prevent the new contract being carried out.
The SCA had no trouble finding that the contracts’ “in writing” requirement was satisfied by a data message in terms of section 11(1) the ECTA. The real issue was whether the names of the parties at the foot of the emails constituted signatures in terms of the ECTA.
“The SCA noted that the approach of our courts to signatures in general has been pragmatic and not overly formalistic and cited numerous examples of where the courts have accepted any mark made by a person attesting to a document,” says Moch. “It held that the typewritten names of the parties at the foot of the emails were intended to identify the parties, constituted data that was logically associated with the data in the body of the emails, and therefore constituted electronic signatures. There was no need for an advanced electronic signature. Accordingly, the SCA found that the cancellation of the agreements was valid.”
However, Moch adds that there are unanswered questions about what happens when numerous people have access to a single email account. “For example, if a personal assistant has ‘proxy’ on a director’s email and regularly sends emails on her behalf, significant issues may arise from a cancellation contained in such an email, particularly if the director has no knowledge of it. In the event of a dispute, evidence would need to be led as to whether the director knew about the email, and there might a question about whether the contract was cancelled by an authorised person.
Consumer Protection Act
The Consumer Protection Act (CPA) overrides any contract that is in conflict with the CPA’s rules, says Broekmann. So even if you intentionally sign an agreement denying your rights under the CPA, the contract will be invalid.
Broekmann lists the rules for a valid contract under the CPA as follows:
- The contract must be in plain language (section 22);
- Any contract with a “protected consumer” (which means any individual or any legal entity with a turnover and an asset value of under R2 million) that limits the consumer’s rights in an unexpected way is invalid (section 4(4));
- A consumer has a cooling-off period of five business days if the contract was the result of direct marketing (section 16);
- The consumer has the right to an itemised breakdown of his or her financial obligations under the contract and to receive a copy of the contract free of charge (section 5);
- All contract terms, the price of the goods or services, and the way the contract is negotiated and administered must be fair, reasonable and just, evaluated with reference to the consumer’s, not the supplier’s, interests (section 48);
- Any contract term that limits the consumer’s rights must not only be drawn to the consumer’s attention, but must also be initialled to show that the consumer is aware of it (section 49); and
- A contract may not state that the supplier escapes liability even if he or she acts in a grossly negligent way. That term – and any other in the contract that does not comply with the CPA – is invalid (section 51).
The last rule is important in the context of indemnity (or exemption) clauses in contracts, which are relied upon by businesses to limit their liability for loss, injury or other ill-effects or damages suffered by consumers on their premises, or as a result of purchasing their goods or services.
Although indemnity clauses are effective if correctly constituted and brought to the attention of the consumer at the time of the decision to purchase, they are always invalid if the indemnified party has:
- Breached the contract;
- Been grossly negligent; and/or
- Acted fraudulently or dishonestly.