2.2 Pre-Contractual Phase: Pacta De Contrahendo (Options & Rights of Preference)

Pacta de contrahendo (options & r.o.ps)

Agreements aimed at concluding a further contract, and binding parties in a position to conclude a further contract.

In pre-contractual relationships, parties can generally just walk away at any time before the conclusion of the contract. Pacta de contrahendo deprive the parties rights to walk away.

Options

An pre-contractual agreement consisting of 2 parts: main/substantive offer (normally stands until it lapses) + an agreement to keep main offer open between offeror and offeree (undertaking not to revoke offer).

If option holder accepts main offer, option falls away upon conclusion.

Unilateral indication of irrevocable main offer?

An agreement is needed between the parties not to revoke (for an option to come into existence), so it is not possible to unilaterally create a binding option.

Oos-Vrystaat Kaap v Van Aswegen

Question about if noting that you’re keeping an offer open for a certain period of time, without agreement with the other party, unilaterally binds you to keeping that option open (creating an option)

Options = established by an offer + an agreement not to revoke the offer. Unilateral invocation of an option is not possible. and in this case, there was no indication OVK responded, stating they would hold VA to the 14 days

Court conlcude that the selller didn’t bind himself not to revoke offer for 14 days, rather just gave the offeree 14 days to accept, in which time the offer could be revoked at any time prior to the offeree’s acceptance.

Requirements for a valid option:

Certainty: contents are clear and certain.
Formalities:
Should be in writing?

Hirschowitz v Moolman: all pacta de contrahendo must comply with the formality reqs of the main contract (if main is written [Alienation of Land Act stipulates such contracts should be] then the option must also be written.

But

Mokone v Tassos (current position): Hirschowitz is erroneous. There is no general rule that options & rights of preference must be in writing just because their main offers are. ALA only refers to alienations of land, which only includes the substantive offer. Option agreements can thus be oral.

Remedies for breach of options

If option is valid (main offer + agreement not to revoke = present), then when the:

1. Offeror cancels agreement, the offeree may claim restitution/damages.
2. Offeror grants the option to the offeree but sells to a 3p, either

a) the offeree can cancle the option and claim restitution (get back any money spent on offer)/damages (depends on if offeree would’ve accepted the main offer, thus exercising the option).
b) the offeree can accept main offer and conclude the contract, then claim specific performance (if seller still doesn’t perform).

i. Normal remedies for non-performance apply from here. Doesn’t matter that there used to be an option agreement because there is now a sale between the parties.

Preference contract

pre-contractual agreements granting a grantee a right of preference regarding a specific future sale agreement, even though there’s no main offer.

Content:
Negative obligation not to sell to others before approaching holder of right +

Positive obligation to offer to holder of right first.

Types of rights of preference:

The actual contract sets out how the preference will operate:
-The holder of the right must make offer to the grantor of the right. e.g. The grantee must offer to the grantor to buy at a particular price. The grantor is not obliged to accept the grantee’s offer.

-The grantor of the right must make an offer once the trigger event has occurred. Once it’s clear that the grantor wants to sell, he must first approach the grantee and offer to sell at a certain price.

The latter is the default option by common law.
-If nothing about the preference is mentioned in the contract, there’s an assumption that the prefrence entails the grantor should make the offer to the grantee first. (Confirmed by the Owsianick case [np]).

Types of trigger event:

1. Grantor makes offer/gives option/sells to 3p (e.g. if X makes an offer to sell to Z, a 3p, it’s an indication that X intends to sell.)

2. Any other manifestation of grantor’s desire to sell (confirmed by one prof, disputed by another who argues there must be a clear offer to sell along with a r.o.p).

Remedies available to grantee

1. Cancellation on the basis of breach: return what was performed, restitution for any payment.

2. Enforce the preference: a) Owsianck case (np): Grantee obtains a court order compelling the grantor to make an offer. Maj judgement = yes, but not accepted as court remedy. Min judgement = not, lacks consensus + possibly bad faith. Courts don’t like to be forceful and want grantor to be autonomous.
   b) Mokone v Tassos (p): grantee can make offer and obtain court order compelling grantor to accept the offer.
   c) Oryx case (np): the oryx mechanism —> grantee may unilaterally “step in the shoes” of the 3p. This applies when the grantee is in the position where the grantor has sold to a 3p, violating the r.o.p. Grantee can then conclude a separate, fully-fledged contract with the same terms. The grantee is not replacing the 3p. Leaves questions: Does this apply to offers? (only sales as far as we know); are there any formalities?; Protection of 3p in good faith?; When must a 3p learn about the right to be in bad faith?

Mokone v Tassos (p)

Tenant had a r.o.p regarding the property he rented ito the lease agreement. But it wasn’t in wiriting, even though it related to a potential alienation of land. Landlord (TP) sold to a 3p, a violation of the r.o.p.

Does the preference need to be in writing?

Court found no, concluding that Hirschowitz v Moolman was erroneous and going on to rule that the ALA covers land sales themselves, not oral prior agreements.

Therefore, it is possible to have an oral preference for an agreement which is to be concluded in writing. The sale agreement must ultimately be in writing, but that doesn’t mean the preference can’t be oral.

Difference between options and preference agreements:

Option:

• requires susbtantive offer

• grantor is obliged to sell if grantee exercises option

• Power in the hands of the grantee

• Terms of main contract set out in offer

Preference:

• No main offer yet maid

• Grantor never obliged to sell

• Power in hands of grantor

• Terms of main contract usually not yet known.