General principles of contracts series; (part 4) consensus (offer and acceptance) (continued)

In the previous article, we discussed at length, that the offer and acceptance must be communicated (and this could be done verbally, via post, via telephone, via email, etc.). In this instalment, we wrap up the discussion and look at other issues pertaining to offer and acceptance.

VI) An offer can fall away before it is accepted

Once the offeror makes his offer, it cannot be expected that the offer remains open for ever - the offeree needs to accept within a certain period of time. But the question is, what period? This is not such an easy question to answer because, unless a set time is stipulated by the offeror, the offer remains open for a "reasonable time" and this, according to the law, depends on the facts and circumstances. In one industry, say property transfers, a reasonable time might be three months. In another, say currency exchanges, a few minutes might be reasonable. It depends on the industry.

Naturally, the offeror may stipulate a time period. Let's say that on 1st March, Werner, who is an in-demand young musician, quotes Willie, a concert promoter, R10,000 to perform at Willie's festival to be held on 1st June. Because Werner is in demand and has other possible work available to him over that period, he can make it clear that, for example, the offer is only valid for seven days. Should Willie not accept within that period, the offer lapses, and if Willie then tries to accept on the eighth day, there will be no contract. (Willie's communication will comprise a new offer which Werner, who now becomes offeree, might accept or decline).

Let's change the facts and presume the conversation goes like this: Willie: "Werner, I would like you to play a set at my concert on 1 June for R10,000." Werner: "Let's make it R12,000." The legal position here is that Willie has made an offer. But Werner has not accepted that offer. In fact, what he has done is to make a counter-offer, and Willie, who now becomes the offeree (whereas he was originally, the offeror), must accept the counter-offer in order for a contract to come into existence.

If Werner then says "OK, I'll do it for R10,000 there is still no contract until Willie replies in the affirmative, because Willie's first offer lapsed when Werner made his counter-offer, and Werner has now become the offeror. Willie is perfectly entitled, in these circumstances, to change his mind and decline, because his offer lapsed on the counter-offer, and the counter-offer has not yet been accepted.

The offeror might make a special kind of offer, called an option. An option is, in fact, two offers in one: firstly, it is the main offer, but coupled with it is a second offer to keep the offer open for the offeree for a specified period. For example, Luke offers to sell his bass amp to Lance for R12,000 and says to Lance that he will keep that offer open for a period of 14 days.

Presuming Lance accepts that second offer, Lance now has 14 days in which to make his mind up about the bass amp. If Lance accepts the main offer within that period, a contract of sale of the bass amp for R12,000 comes into existence. If he does not, the main offer simply falls away after 14 days. But during that period, Luke may not offer the amp to anyone else, or else he will be in breach.

VII) Misrepresentation and Mistake can affect consensus

This is a complicated and involved part of the law, so best to keep this discussion to the basics.

Misrepresentation

As in any industry (particularly in South Africa), fraud is common in the music business. We will not look at the criminal aspects of fraud, but only contractual ones. Fraud falls under the heading of "misrepresentation" because it is one of three types of misrepresentation that can affect a contract. They are:

a) fraudulent misrepresentation,

b) negligent misrepresentation and

c) innocent misrepresentation.

In all three cases, a misrepresentation is made, which can affect the validity of the contract. A misrepresentation may be defined as "a false statement of fact made by one of the contracting parties that is not a term of the contract, but that induces the other contracting party to enter into a contract that he would otherwise not have entered into."

So it is a false statement, made during the negotiations, that leads one of the parties to enter into the contract, but it is not one of the terms of the contract (the falsehood of which would be a breach of contract - a different thing). Naturally, like all good legal rules, there are exceptions: for example, it has been held that the word "statement" does not necessarily have to be a statement in words. It can be made by conduct. In fact it may even be made by omission, which means not making a statement when the law places an onus on you to do so.

If the party making the false statement knows that it is untrue, the misrepresentation is fraudulent. If he does not know, but ought to have known, it is negligent. If it cannot be said that he knew it was false, nor that he ought to have known, it is innocent. Let us look at these principles by way of example. Firstly, let's look at the word "statement." Say that Oliver is buying a guitar from Oswald.

During their discussions, Oswald tells Oliver that the guitar is a 1947 Fender Stratocaster, knowing that this is the type of vintage guitar that turns Oliver on. In fact, the guitar is a cheap Taiwanese copy of '47 Strat. Clearly, a false statement of fact has actively been made, therefore there is a misrepresentation that affects the validity of the contract. But what if Oswald never actually said that the guitar was a '47 Strat, but Oliver got this impression because the guitar case was labeled "1947 Stratocaster", and Oswald just kept quiet? This would still be a misrepresentation, even though Oswald never actually said anything, because on these facts the law would place an onus on Oswald to correct the possible misapprehension.

Now, if Oswald made the statement and knew it was false, this would be a fraudulent misrepresentation. If Oswald did not know it was false (or there was insufficient evidence to prove that he did), the question is ought he to have known? If so, it is a negligent misrepresentation. If Oswald is a recognised dealer, he definitely ought to have known. (Some might argue that any retail seller of a guitar ought to know what make and model it is).

But let's presume for a second that Oswald is not a dealer, the guitar is a truly excellent copy, has been road-worn to look like an old guitar, and Oswald was reasonably and properly convinced when he bought it that it was a '47 Strat. (The test applied by the law here is: "would a reasonable man in Oswald's position have known the truth?") If a reasonable man would not have known the truth, then Oswald's misrepresentation is not regarded as negligent, but innocent.

The reason why these distinctions are important is that the law treats the three different types of misrepresentation differently: when any misrepresentation has taken place, the innocent party can cancel the contract. When the misrepresentation is fraudulent or negligent, the innocent party can also sue for damages, but not if the misrepresentation was innocent. So on the above example, let's say that Oliver was buying the guitar from Oswald because he intends to sell it to a collector that he knows, at a profit of R10,000, Oliver can only sue Oswald for the R10,000 lost profit if the misrepresentation was fraudulent or negligent.

Mistake

A mistake made by one of the parties as to the nature of the contract can affect consensus. This stands to reason, when you think about it, because a mistake by one of the parties, if fundamental enough, means that their minds have not met. Let's take the following example;

Percy, a singer, telephones Poncenby, who sells and rents audio gear, and says to him: "Listen, Ponce, my mate, I've got a gig on Saturday, and I need a PA. My budget is R30,000." Poncenby replies "No problem, I accept. I'll deliver it on Friday." Now, what is in Percy's mind is that he wants to rent a large PA for a big outdoor gig, and what Poncenby thinks is that Percy wants to purchase a small PA suitable for club work.

So Poncenby delivers the small PA, thinking that he has made a sale. Is there a contract, and therefore is Percy in breach of contract when he refuses to take delivery and will not pay? The answer is there is no breach of contract because at least one of the parties was mistaken as to the fundamental nature of the contract, therefore the parties' minds did not meet. This is a classic case of failure to reach consensus ad idem due to mistake.

Another might be this: Jess knows that the legendary Richard Mitchell is one of the top music producers in South Africa, so she looks his number up in the book and phones him, offering him R50,000 to mix and produce her next album. He accepts. When she turns up to the first session, she realises that she has been talking to the wrong Richard Mitchell (it is, after all, a very common name).

This would be a mistake as to the identity of the person with whom she is contracting, (which is a very material mistake, because she is looking for Richard's unique musical production talents). The contract is therefore void. But remember, the mistake must be material. (Let's say she hired the correct producer, and thought, at the time she hired him, that she could get his wife to sing backing vocals for free. Then she finds out he has recently been divorced. Is the contract still binding? Yes, because the mistake is not a material one).

VII) Duress and undue influence can affect consensus

"Duress" takes place when a person is 'forced' to enter into a contract he would otherwise not have entered into by the exertion of unlawful pressure. You probably know it as blackmail. Nick Nasty, a record company executive, is desperate to sign Nana, a successful artist who is being pursued by lots of record companies. It comes to Nick's attention that certain compromising photos of Nana in the buff on a dirty weekend with her boyfriend exist. He gets his hands on the photos and threatens to publish them on the internet if Nana does not sign to his company.

So she does. Is Nana now bound to the contract? The answer is no - the contract is voidable (not void) due to duress. Voidable means Nana gets the choice to uphold or strike down the contract. (Void means it is not, and never was, a contract, so there is no choice). The same would apply if Nick had held a gun to Nana's head and forced her to sign - the contract would be voidable due to duress.