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02 Formation of a contract

02 Formation of a contract

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Financial Training Company

2007

Corporate and Business Law- F4 (Zimbabwe)
Casebook

Essentials of a simple contract
The essentials of a simple contract can be summarised as follows: there must be an agreement, intention to enter into legal relations, capacity to contract, reality of the consent and lawfulness of the object.

Agreement: In most cases if not all, an agreement may be analysed as an offer made by one party to another and acceptance by that other party. It was said in Ley v Banket Holdings (Pvt) Ltd 1956 that, in considering whether there is an agreement between two parties, the court is not interested in the state of mind of the parties considered in the abstract. It must decide the issue on the state of mind of the parties as manifested by word or deed. Intention to create legal relations: Even when parties have reached an agreement, there is not necessarily a contract in being. The Roman-Dutch common law demands also that there be an intention to enter into a legal relationship. Without this intention there will be no contract but only an agreement. An invitation to dinner may result in an agreement, but such an arrangement is unlikely to be intended to have legal consequences. An arrangement of this kind is likely to be a social one with no legal consequences intended, Edwards v Skyways 1964.

Capacity to contract: The law does not allow every person to enter into contracts freely. In some cases the law denies a person contractual capacity in order to protect him. Classes of persons who fall into this category are infants (sometimes called minors), persons of unsound mind and drunk persons.

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Reality of consent: Where there is an offer and acceptance and both parties are of full age, there is an apparent contract. Yet this may have no legal effect at all on account of the presence of some additional factors. These factors are known as ‘vitiating factors’. They include mistake, misrepresentation, duress and undue influence, illegality and non-disclosure in contracts of ‘utmost good faith’.

Lawfulness of the object: Any contract in which the provision or the object is unlawful will be void and, from the point of view of one or both of the parties, will be unenforceable. This situation may arise because the contract is (a) illegal at common law or (b) illegal by statute or (c) void by statute.

Invitation to treat
A contract is defined as 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 being of the same mind as to the subject matter to perform positive or negative acts which are possible of performance.

For the contract to be binding there must be a valid offer and a clear acceptance of the same. Before the offer can lead to a binding contract, the offer must define all the terms on which agreement is sought, must be consistent with the essentials of contract and must be firm and deliberate with an intention of its being accepted and not a mere invitation to do business.

The invitation to do business is commonly known as the invitation to treat. Invitation to tenders, advertisements and the display of prices on a shop window usually constitute an invitation to treat rather than a firm offer. In Crawley v Rex (1909), a shopkeeper advertised a particular brand of tobacco at a cheap price, displaying a placard outside his shop on which the price was shown. Crawley entered the shop, bought some tobacco and left. He then re-entered the same shop and asked for some more tobacco. This time around, the shopkeeper refused and upon being requested to leave the shop Crawley refused to do so without the tobacco. Ruling on the matter the court said: ‘It is clear that according to the ordinary law of contract the display of an article with a price on a shop window is merely an invitation to treat. It is in no sense an offer for sale, the acceptance of which constitutes a contract …’ Likewise a quotation is not a firm offer but simply an invitation to treat.

In this case Nelion Dube’s statement that ‘you might be interested in this and why not get a

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quotation together and let me have a look at it’, clearly is not a firm offer to create a binding contract but simply an invitation to treat or to do business. The fact that an offer must be firm and deliberate and not a mere invitation to do business is highlighted by the case of Crawley v

R (1909) (supra), Carlill v Carbolic Smoke Ball Company (1893), Lee v American Swiss Watch Company (1914).

The present case must clearly be distinguished from the case of Brown and Company v

Jacobson (1915) in which J wrote saying ‘should you require a guarantee from me l am quite
willing to do so … trusting you agree to my proposal.’ And where B and Company replied, ‘we beg to state that we shall be very pleased to agree to your request in consideration of your guarantee’. It goes without saying that the court held that there was a contract of guarantee.

Validity of a contract
Indeed it is common cause that the general rule is that no formalities are prescribed for the validity of a contract. This means that the parties do not have to announce their intention to contract in any formal manner. If an offer is clear, unconditional, complete, unambiguous, communicated to the offeree with the intention that it will serve as an offer and equally the acceptance is clear, unambiguous, communicated by the offeree to the offeror within the stipulated time and manner, a valid contract will result therefrom. Thus the contract may be concluded verbally or even tacitly and still be perfectly valid. Legislation has however created certain exceptions to the general rule and in such specific instances contracts would have to comply with certain formalities in order to be valid. The three broad categories of exceptions are as follows: (1) That the contract must be rendered in writing (2) That the contract must be notarially executed (3) That the contract must be registered. 1. Writing If a contract is in writing irrespective of whether this is due to the decisions of the parties or whether it is required by law the parole evidence rule applies to the contract. In terms of this rule the document is the sole and exclusive source of the terms of the contract and the terms of the contract may therefore not be sought in any other expression of intention whether written or verbal. Any amendments, omissions or additions must also be in writing. Contracts that have to be in writing are, inter alia, the following: – The alienation of immovable property must be in writing and signed by and on behalf of all the

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parties in order to be valid. Alienation includes purchase and sale, exchange and donation of immovable property. – Contracts concluded in terms of the Hire Purchase Act. – Suretyship agreements must be written and signed by or on behalf of the parties. – Contracting parties may agree verbally that their contract will be reduced to writing. If the intention is that the writing down of their contract will be a condition precedent or prerequisite for the validity thereof, no contract will be deemed to exist until such time as the contract has been written. In Woods v Walters (1921), in an action to compel execution and performance of a contract for the lease by Woods to Waltersof certain land plus a furnished house and other buildings, Woods argued that he was not bound since it had been agreed that the contract must first be reduced to writing – which had not been done. The court ruled that although

‘the broad rule is that writing is not essential (except in certain cases) to the validity of a contract ... parties may of course agree that there will be no vinculum juris (legal bond) between them until that has been done...’ In conclusion, the principle here is that where a signed written document is agreed
between parties to be a pre-condition of a contract, such contract is void without it. But where writing is simply mentioned as desirable for the record, lack of a written agreement does not void the contract.

2. Notarial Execution Notarial execution entails the conclusion of the document in the presence of a Notary Public. Examples of contracts that have to be notarially executed are the following: (a) antenuptial contracts (b) leases of mineral rights and cessions of the right flowing from these contracts have to be notarially executed (c) change of name.

3. Registration Registration entails the making of an entry in the registers of the state in order to publicise the contents of the particular contract. Examples include antenuptial contracts, leases of immovable property for ten years or longer, marriage contracts, etc.

Implied contracts

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Parties to a contract can agree on anything as long as it is legal. This is called freedom of contract. Parties can agree on whatever term of their contract either expressly or impliedly. Terms of a contract determine the consequences of a contract. In the absence of express agreement, certain terms are implied by operation of the law, trade usage or facts. In the event of any dispute, it should be borne in mind that it is not the court’s business to improve on the contract the parties have made. The court should imply terms reasonably necessary in the circumstances. Courts should not make contracts for the parties implying terms which parties would never have agreed. In the case of Reigate v Union Manufacturing Co (1918) Sculton L J said ‘a term can be implied if it is necessary in the business sense to give efficacy to the contract i.e. if it is such a term that it can confidently be said that if at the time the contract was negotiated someone had said to the parties: What will happen in such a case? They would both have agreed that: of course so and so will happen we did not trouble to say that, it is too clear.’

Necessity in the business sense must be clearly distinguished from reasonableness and a term will not be implied merely because it would seem reasonable to do so. Business efficacy must be judged against the circumstances contemplated by the parties and not in light of any unusual situations that have subsequently developed. An implied term is a term which is implied either ex lege or as a result of circumstances pertaining when the contract was concluded. In the case of Alfred McAlpine and Son (Pty) Ltd v

Transvaal Provincial Administration (1974), Corbet JA said the term ‘implied term’ denotes two
distinct concepts. Firstly, it is used to describe an unexpressed provision of a contract which the law imports, generally as a matter of course. It is imposed by the law from without, often where it is by no means clear that the parties would have agreed to incorporate it in the contract. Secondly, an implied term is used to denote an unexpressed provision of the contract which derives from the common intention of the parties as inferred by the court from the express terms of the contract and surrounding circumstances.

It should be emphasised that in order to have business completeness, common intention should include not only the actual intention but also imputed intention. In other words, the court implies not only terms which the parties must actually have had in mind but did not trouble to express, but also terms which the parties, whether or not they actually had them in mind, would have expressed if the question, or the situation requiring the term had been drawn to their attention.

Implied terms of law may be derived from the common law, trade usage or custom, or from the statute. Despite the general principle that parties are free to contract as they wish, the common law permits the term that would be implied to be expressed, modified or excluded (Electra Rubber Products (Pvt) Ltd v Socrat (Pvt) (1981)). Under the common law,

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the seller’s implied guarantee or warranty against latent defects is usually an implied term in a contract of sale. However, parties can agree to expressly exclude the implied term in a contract of sale. The same applies where parties can agree to expressly exclude the implied warranties see Elston v Dicker (1995). Under the sale of movables some terms of a contract are implied from the Consumer Contracts Act [Chapter 8:03].

By implying so many terms in the sale of many movables, it saves a lot of time, effort and affords protection to weaker parties in the contract, particularly consumers. For instance, every day one buys bread, salt or cooking oil in a supermarket, it is not necessary to enter into full contracts of sale expressly stating all terms and conditions of sale. Terms implied by law may be affected by trade usage. This occurs when a person enters into an agreement under circumstances which are governed by a particular trade. That usage must be considered part of the agreement whether the parties knew of the usage or not, unless they have expressly agreed to exclude it. The requirements of trade usage are that it must be notorious, certain, reasonable and not contrary to positive law. Coults v Jacobs (1927). The application of these requirements is exemplified by Barclays Bank Ltd v Smallman (1976) in which the banking usage of charging compound interest on overdrafts was sufficiently proved. Similarly, in the case of Greenacres Farm (Pvt) Ltd v Haddon Motors (Pvt) Ltd (1983) in which an alleged usage in the motor vehicle trade that a request to ‘check over’ a vehicle included putting it to running order was not properly and sufficiently proved.

It should be noted that some terms of a contract may be implied from the facts. In Elite Electrical

Contractors (EEC) v The Covered Wagon Restaurant (CWR) (1973) CWR, a restaurateur, hired
EEC, a proprietor of a small electrical business, to do all the electrical work involved in moving a stove and other electrical appliances from one part of his kitchen to another. Due to difficulties in making an advance estimate of the cost of work of this kind, no firm quotation was given and the parties agreed that EEC would proceed on this basis. Having duly completed the work, EEC contended there had been an implied agreement that CWR would pay a fair and reasonable price for the materials supplied and services rendered. The court held that the term implied and relied upon by EEC was valid and enforceable. The court emphasised that the term implied in any particular contract will depend upon the circumstances surrounding that contract and it is not a matter to be decided by reference to other cases.

Implied terms are necessary to enhance business efficacy but there is a danger that the courts may end up making contracts for the parties, by implying terms which the parties never agreed on. This would end up conflicting with the time honoured Roman Dutch principles of freedom of

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contract and the doctrine of sanctity of contracts. In Hamlyn and Company v Wood (1891) W, who were brewers, agreed in writing to supply H all the grains made by W for ten years. After five years W sold their business. The court held that, a term would not be implied that W would not by any voluntary act of their own prevent themselves from continuing the sales of grains to H for ten years. The court ought not to imply the term unless it necessarily arises from the language of the contract itself, and the circumstances under which it is entered into. Such interference with the parties’ contract, that the parties must have intended the stipulation in question must be exercised cautiously and sparingly.

Unless specifically excluded by the agreement of sale it can be said in summary that the corresponding duties and rights of the buyer and seller are in a way part of the implied terms of an agreement of sale. These are as follows: The buyer (implied duties)

1. To pay the price as agreed and if no specific figure has been mentioned it is implied that the purchaser is liable to pay a reasonable price. 2. To compensate the seller for any expenses incurred in safe-keeping and maintaining the thing sold until delivery can take place. The seller’s duties are the following: 1. To care for the thing sold until delivery takes place. 2. To deliver the thing sold. 3. To guarantee the purchaser undisturbed possession. This is known as the tacit warranty against eviction and it forms an integral (ex lege) part of the contract of sale. The warranty ensures that the purchaser will not be disturbed in his possession, that is, he will have peaceful and quiet enjoyment of the thing. 4. To give the purchaser a warranty against latent defects. The seller (ex lege) is obliged to deliver the thing sold to the purchaser without defects. The seller is therefore liable for any latent defects in the thing sold irrespective of whether he was aware of such defects at the time of the conclusion of the contract of sale.

Apart from the contract of sale there are a lot more other forms of contracts in which the rights and duties of the parties are regulated and governed by the implied terms of the agreement. The parties are at liberty to agree on the regulatory framework of their contract as long as the proposed terms are not specifically outlawed by legislation or any other positive law. Examples (among others) of such contracts include agency, lease, partnership and many more.

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caveat subscripto rule
In terms of the caveat subscripto rule the general rule of law in Roman–Dutch law is that a person who signs a document is presumed to have familiarized himself with the contents of that document. The general effect of signing a contract is that the party signing the contract is bound. This rule is applied not only when the person signing studies the document but also when he signs carelessly or recklessly and when he fails to avail himself of an opportunity to study provisions incorporated by reference. In George v Fairmead (1958) G, a hotel guest signed a hotel register which contained contractual terms some of which he completed by filling in blank spaces but the rest of which he did not read. One clause exempted the proprietor from liability for loss caused by theft. Certain clothing belonging to G was stolen and he sued the hotel company. The court held that G was bound by the terms because he knew that he was signing a contractual document. And in the case of Bhikhagee v Southern Aviation Company (1949) the court made the following apposite remark in relation to the caveat subscripto rule.

‘It is a sound principle of our law that when a man signs a contractual document he is taken to be bound by the ordinary meaning and effect of the words which appear over his signature, although he may not have read them and professes to be ignorant of their contents . . .’
However in situations where simple justice between man and man so requires our courts can depart from the caveat

subscripto rule. For example where there is fraud, illegality, duress, mistake and
misrepresentation the affected party might not be bound by his signature. Ultimately each case will depend on its own facts.

The following cases illustrate how the exceptions operate. In Curtis v Chemical Cleaning and Dyeing Company (1951), C, when delivering a dress to a company for cleaning, was asked to sign a document which contained a clause that the dress was accepted on condition that the company was not liable for any damage howsoever arising. C asked why she had to sign it and was told the company would not accept liability for damage done to beads and sequins on the dress. She signed without reading the whole document. HELD, the company’s assistant had made the misrepresentation innocently, but nevertheless as C had relied on it, she was not bound by the wide indemnity contained in the document. And in Shephard v Farrel’s Estate Agency (1921) S who wished to sell his business had gone to the estate agency, being induced by a newspaper advertisement of the agency: ‘Our motto no

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sale, no charge’. He was given a document to sign which was in direct conflict with the advertisement, namely that the agency would have the sole selling right and would receive commission if the business was sold within three months, whether through the agency or not. S’s attention had not been drawn to the fact that the terms of the advertisement were being departed from. HELD, S was not bound by the condition.

Quasi-mutual assent
As a general rule if a dispute arises in terms of the existence of a contract, it becomes necessary to determine the content of the promises made and the obligations undertaken by either party. The idea is to establish the true intentions of the parties at the time they conclude the contract or purported to conclude one. The intention of the parties is therefore paramount and if the parties do not envisage legal consequences the agreement between them is not a contract.

A contract can only come into being if the contracting parties have the intention to be bound to each other and if they intentionally reach unanimity on all the terms of their agreement. The unanimity between the contracting parties (consensus ad idem) is therefore the cornerstone of a contract. When consensus is achieved between the parties and provided that the other requirements have been met a contract comes into existence between the parties. Apart from an express offer and the acceptance, an agreement can be reached through conduct. Conduct can take the place of written and spoken words in the case of both offer and acceptance or in the case of the one or the other. In deciding whether there is an intention to contract the test is objective and not subjective. The practical effect of the quoted statement is that, in the main, in determining the existence of a contract the courts look for offer and acceptance, be it express or implied. Short of that formula, the parties might still be deemed to have concluded a binding agreement on the basis of quasi-mutual assent. In terms of this doctrine a person who gives a reasonable man the impression of consensus in relation to an intended contract will be taken to have indeed consented even if inwardly they have reservations and misgivings which remain unexpressed. Some of the case law which underscores how the principle of quasi-mutual assent operates was decided as follows:

In Levy v Banket Holdings (Pvt) Ltd (1956), B was successor in title to a partnership to which L had sold a business in Banket and leased the plot on which the business was situate for five years. B alleged a verbal agreement between L and the partnership to grant an option to renew the lease for a further five years. L denied this despite the fact that he accepted £600 proffered

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in terms of the contract which unequivocally stated that the money was consideration for the option to renew. It was held that L’s conduct gave rise to an inference that he had agreed to grant an option to renew the lease.

Equally in the case of Collen v Reitfontein Engineering Works (1948), after some correspondence regarding the supply of a pump and a Fairbanks Morse engine, C wrote to R: ‘Enclosed please find my cheque in part payment of pumping plant.’ R paid the cheque for £150 into its banking account but did not reply to the letter. Later R supplied a different type of pump which proved unsatisfactory and C repudiated the contract. It was held that treating C’s letters as an offer, R did by its conduct accept the offer.

It did not reply in writing that it accepted, but it paid C’s cheque into its banking account. Its conduct in so doing and its retention of the proceeds of the cheque, coupled with the fact that it failed to notify C that it did not accept this offer, was a sufficient indication to C that it had accepted his proposal. Finally in the case of Peters and Company v Salomon (1911), having undertaken to pay Berger’s creditors, including S, the amounts of their respective accounts against B, P requested them to send in their statements of account. S sent in a statement showing the sum of £490 to be owing to him, and P without raising any objection to this amount, confirmed the undertaking previously given. HELD, although P had previously agreed to the undertaking having been led by an examination of B’s books to believe that £345 was owing by B to S, and may really have undertaken to pay S the amount which by its course of dealing with him it had led him reasonably to believe would be paid. Said the court, ‘when a man makes an offer in plain and unambiguous language which is understood in its ordinary sense by the person to whom it is addressed, and accepted by him bona fide in that sense, then there is a concluded contract. Any unexpressed reservations hidden in the mind of the promisor are in such circumstances irrelevant. He cannot be heard to say that he meant his promise to be subject to a condition which he omitted to mention and of which the other party was unaware . . .’ In the main, the quote captures the spirit of our law in terms of the courts’ approach to the doctrine of quasi-mutual assent. However the rule will not be applied where there was a mutual mistake, the parties honestly attaching different meanings to words in a contract which are not self-explanatory.

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Contracts with minors

It is common cause that at 17 years of age Solomon is a minor and therefore he has limited contractual capacity. In our law, a contract involving an unassisted minor is voidable at the option of the minor. The option of treating the contract as void or valid rests with the minor. If the minor elects to treat the contract as valid he can compel the other party to perform. On the other hand if the minor prefers to treat the contract as void the other party cannot compel him to perform his part of the agreement. In Edelstein v Edelstein (1952) the court made the following observation:

‘From the principles of the law it is clear that a minor who contracts without the assistance of his guardian can render others under an obligation to himself, but does not himself become obliged to them . . .’
There are a number of common law and statutory exceptions under which an unassisted minor can be contractually bound. One of the exceptions (which happens to be the most applicable here) relates to tacit emancipation. Where a minor is tacitly emancipated he can incur a binding contractual obligation within the field of his emancipation. Tacit emancipation occurs when he is allowed by his guardian to carry on business or other occupation on his own behalf. In Dickens v Daley 1956 Daley a minor aged 20 (age of majority then was 21) gave a cheque as rent for Dicken’s house which Daley’s mother and stepfather had agreed to hire at the time and for the previous twelve years Daley had been living with his mother and stepfather, he was contributing a sum to his mother for board and lodging, he had been in employment as a clerk for four years, he had nothing to do with his father, his guardian, who exercised no control over him. Two and a half years earlier he had opened up a bank account without his father’s assistance which he operated unassisted.

The court held that inspite of his minority Daley was liable on the dishonoured cheque drawn by him because he was tacitly emancipated. In this case the following evidence points in the direction of tacit emancipation. (1) That Solomon is only one year short of majority status (2) He is gainfully employed as a mechanic (3) He lives in an apartment in town not with his parents or relatives but with a girlfriend who is also employed. In view of these considerations the court is likely to find Solomon liable on the contract on account of tacit emancipation.

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Right of first refusal

An option is 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 substantive offer) made by the grantor to the holder. Venter v Birchholtz (1972). The view that the option is already a substantive contract, qualified by a suspensive condition has been rejected. See Ficksburg

Transport (Edms) Bpk v Rautenbach (1986).

Case law authorities do not always distinguish between an option and a right of first refusal. See

Boyd v Nel (1922). The distinction is not always apparent to those who make contracts but the
concepts are not the same. This position is confirmed by Oglivie Thompson JA in the case of

Owsianick v African Consolidated Theatres (Pty) Ltd 1967 when he said:
‘A right of pre-emption is well known in our law (See Cohen v Behr (1946) and it is to be distinguished from an option to purchase. Upon exercise of the latter, by the holder of the option, the grantor of the option is obliged to sell. The grantor of a right of pre-emption cannot be compelled to sell the subject of the right. Should he decide to do so, however, he is obliged, before executing his decision to sell, to offer the property to the grantee of the right of pre-emption upon the terms reflected in the contract creating the right.’

In the case of Sawyer v Chioza & Ors (1999) the court was seized with the distinction between an option, right of first refusal and pre-emption. The honourable judge, Justice Gwaunza, quoted with approval, Coppers Landlord and Tenant 3rd Edition, where the author states that the right of first refusal is synonymous with the right of pre-emption. The right of pre-emption entitles the holder of the first right of purchase should the grantor wish to sell the property. The court ruled that ‘an agreement of pre-emption contains both a negative and a positive element. The negative element is that the grantor is restrained from selling to a third party, the positive element is once he is prepared to sell he is under a positive obligation to sell to the grantee.’ On the other hand an option contract creates at least one obligation in terms of which the holder of the option has the right to claim from the option grantor that the latter shall keep the substantive offer open for acceptance. Generally, therefore, the grantor of the option has a duty not to do anything which may prevent the option holder from creating an enforceable contract by exercising the option. Bradt v Spies (1960). Coopers (supra) notes that, ‘whereas an option to purchase is an irrevocable offer to sell, and if accepted, gives the option holder the right to conclude a sale by exercising the option which he has accepted, an agreement of pre-emption

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does not compel the grantor to sell, it only compels him to give the grantee the right to purchase if the grantor proposes to sell.’

It should be noted, however, that although there is a fundamental difference between an option to purchase and an agreement of pre-emption, the word option is frequently used in granting a right of pre-emption, conversely, phraseology usually associated with a pre-emption agreement may be used in granting an option. See Sawyer v Chioza (1999).

Negotiations
One of the characteristics of our common law is that, in general, no special formalities are required for the making of an enforceable contract, Goldblatt v Fremantle 1920. This means that an oral or even a tacit contract, once it’s in existence and terms have been satisfactorily proved, is every bit as legally valid as a written contract.

A decision by the parties to make their contract in writing is not always clear-cut. It may sometimes become necessary to interpret phrases used in the course of negotiations or in informal contracts. The issue is to discover the intention of the parties. It could be that Edison and Bota intended not to be bound until the formal contract is signed. It could also be that they intended to be bound by the formal contract and that the formal contract is contemplated only for the proof.

The position stated in Woods v Walters 1921 is that, where the parties are shown to have been

ad idem (in consensus) as to the material conditions of the contract, the onus of proving an
agreement that legal validity should be postponed until due execution of a written document lies upon the party who alleges it. It appears that Bota, by stating in his letter that ‘he had instructed his lawyers to prepare the agreement’, intended to be bound by what was stated in the letter until a proper and formal document was drawn up by the lawyers. This was the decision which was reached in Mocke v Reuenback 1936 where the circumstances were almost the same.

However, if the court is of the view that the informal arrangement is binding but contains an obligation to execute the contemplated formal contract, such an obligation can be enforced by the court by an order for specific performance.

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