LAW135D: Law I Study Notes (TUT) – Comprehensive Exam Guide

These study notes are designed for LAW135D: Law I as offered at South African institutions such as Tshwane University of Technology (TUT), and are also relevant to first‑year law and commercial law modules at UNISA (e.g. CLA1501, ILW1501) and Central University of Technology (CUT). They focus on foundational South African legal principles that typically appear in National Diploma: Internal Auditing and other business‑related qualifications. Use this as an integrated, exam‑oriented guide: it explains core concepts, shows how they interrelate, and gives applied examples relevant to internal auditing and business practice.

1. The South African Legal System and Sources of Law

Understanding LAW135D begins with a solid grasp of how the South African legal system is structured and where law comes from. Many exam questions in TUT’s LAW135D, UNISA’s CLA1501 (Introduction to Law), and CUT commercial law modules test this foundation directly or use it as assumed knowledge in problem‑type questions.

1.1 Legal Systems and Classifications

South Africa’s legal system is a mixed (hybrid) legal system, drawing elements from:

Roman‑Dutch law (our common‑law foundation, particularly in private law).
English law (especially in procedural and commercial law).
Indigenous African customary law (for communities living according to customary norms).
Modern constitutional and statutory law (post‑1994 democratic framework).

Key classifications often examined:

Public vs Private Law
- Public law: Governs the relationship between the state and individuals, and the organisation of the state.
  - Examples: Constitutional law, administrative law, criminal law, tax law.
  - Exam‑type question: “Is criminal law public or private law? Motivate.”
- Private law: Governs relationships between private persons (natural or juristic).
  - Examples: Law of contract, law of delict, family law, succession, property law.
  - Very important for internal auditing and business because most disputes are contractual or delictual.
Substantive vs Procedural Law
- Substantive law: Defines rights and duties (e.g., elements of contract, definition of theft).
- Procedural (adjectival) law: Sets out processes to enforce rights (e.g., rules of court, criminal procedure).
- Exams often ask you to distinguish and give examples.
Civil vs Criminal Law
- Criminal law:
  - Purpose: Punish unlawful conduct against society.
  - Parties: State (prosecution) vs Accused.
  - Standard of proof: Beyond reasonable doubt.
  - Outcome: Conviction or acquittal; sentence may include imprisonment, fines, correctional supervision.
- Civil law:
  - Purpose: Resolve disputes between private parties; provide compensation or specific performance.
  - Parties: Plaintiff vs Defendant (or Applicant vs Respondent).
  - Standard of proof: On a balance of probabilities.
  - Outcome: Court order (e.g. payment of damages, interdict, declaration of rights).
- Internal auditors should recognise that fraud can result in both criminal prosecution and civil action for damages or recovery.

1.2 The Constitution as Supreme Law

The Constitution of the Republic of South Africa, 1996 is the supreme law.

Section 2: States that the Constitution is the supreme law and any law or conduct inconsistent with it is invalid.
Implication: All common law, customary law and legislation must comply with constitutional rights and values (e.g. dignity, equality, freedom).

Key constitutional aspects:

Founding provisions (Chapter 1):
- South Africa is a sovereign, democratic state founded on human dignity, equality, non‑racialism, non‑sexism, supremacy of the Constitution and the rule of law.
Bill of Rights (Chapter 2):
- Contains fundamental rights such as:
  - Equality (s 9), human dignity (s 10), freedom and security of the person (s 12),
  - Privacy (s 14), freedom of expression (s 16),
  - Property rights (s 25), access to courts (s 34), just administrative action (s 33).
- Many exam questions in LAW135D ask you to identify whether a right has been infringed and, if so, how courts might approach the limitation (using the limitations clause, s 36).

For internal auditors:

Constitutional values inform legislation like PAIA (Promotion of Access to Information Act) and POPIA (Protection of Personal Information Act), which directly affect how audits are conducted, what information can be accessed, and how data must be protected.

1.3 Sources of South African Law

Law students at TUT, UNISA, and CUT are required to know the hierarchy and types of sources of law.

Primary sources (binding):

The Constitution
- Highest authority; all law must conform to it.
Legislation (Statutes and Subordinate Legislation)
- Acts of Parliament (national laws) – e.g. Companies Act 71 of 2008, Income Tax Act 58 of 1962.
- Provincial legislation.
- Municipal by‑laws.
- Subordinate legislation: Regulations, rules and notices made under authority of an Act.
- For internal auditing:
  - Companies Act, PFMA, MFMA, Auditing Profession Act, etc., provide the legal framework for corporate governance and public finance.
Case Law (Judicial Precedent)
- Decisions of courts interpret and apply statutes and common law.
- The doctrine of stare decisis: Lower courts must follow decisions of higher courts in the same hierarchy.
- Hierarchy of courts (in simple form):
  1. Constitutional Court – highest court on all constitutional and general legal matters.
  2. Supreme Court of Appeal (SCA) – highest court for appeals except in constitutional matters.
  3. High Courts (and specialised courts like Labour Court, Competition Appeal Court).
  4. Magistrates’ Courts (District and Regional).
- Precedent is central for exam problem questions: you may have to apply a rule from a leading case to a new fact pattern.
Common Law
- Developed primarily from Roman‑Dutch law, as refined by South African courts.
- Governs many areas not fully codified by statute (e.g., delict, contract).
- Still valid unless amended by legislation or declared unconstitutional.
Customary Law
- Indigenous African legal systems, recognised by the Constitution (s 211) and legislation (e.g., Recognition of Customary Marriages Act 120 of 1998).
- Applies when:
  - The parties are members of a community living under customary law;
  - Application is consistent with the Constitution and any applicable statute;
  - There is no clear exclusion by the parties.
- For LAW135D exams: know that customary law is subject to the Constitution and must respect equality and dignity.

Persuasive (secondary) sources (not binding, but influential):

Academic writings (textbooks, journal articles, expert commentary).
Foreign law (decisions of courts in other jurisdictions).
Obiter dicta (statements in judgments not essential to the decision).
These can influence how courts develop common law but are not binding.

1.4 Legislation: How Statutes Are Interpreted

Exams in LAW135D and UNISA’s ILW1501 often test statutory interpretation.

Key principles:

Literal (textual) approach:
- Start with the ordinary grammatical meaning of the words.
Contextual approach:
- Read words in their context (within the section, the Act as a whole, and the broader legal system).
Purposive (teleological) approach:
- Consider the purpose and underlying values, especially when interpreting the Bill of Rights and rights‑impacting legislation.
Presumption of constitutionality:
- Where possible, courts interpret legislation in a way that is consistent with the Constitution.
Use of internal and external aids:
- Internal: long title, preamble, definitions, headings.
- External: legislative history, law reform commission reports, international law.

Example relevant to auditing:

Interpretation of the Companies Act provisions regarding directors’ duties: courts look at the wording (“must act in good faith and for a proper purpose”), context (corporate governance framework), and purpose (protect shareholders and creditors, ensure transparency).

1.5 The Court Structure and Jurisdiction

Understanding which court hears what matter and the appeal process is essential.

Basic structure (simplified):

Constitutional Court
- Final court of appeal in all matters (constitutional and general) where it grants leave.
Supreme Court of Appeal (SCA)
- Hears appeals from High Courts, except where the Constitutional Court has exclusive jurisdiction.
High Courts (divisions)
- Unlimited jurisdiction in civil and criminal matters (unless otherwise provided).
- Also review and appeal court for Magistrates’ Courts.
Magistrates’ Courts
- District: limited monetary jurisdiction in civil matters; less serious criminal matters.
- Regional: higher monetary jurisdiction; more serious criminal matters (e.g., serious assault, certain fraud cases), but not matters like treason.

Specialised courts:

Labour Court and Labour Appeal Court.
Tax Court.
Competition Tribunal and Competition Appeal Court.
Internal auditors may see matters go to:
- Specialised courts (e.g., Tax Court in tax audits).
- Criminal courts (fraud, theft).
- Civil courts (recovery actions, contractual disputes).

Exam tip:

Be able to distinguish original jurisdiction (hearing a matter for the first time) from appellate jurisdiction (hearing appeals).
Recognise which court has authority to hear, say, a R250 000 contractual claim between two companies (often Magistrates’ Court: Regional Division, or High Court depending on rules and parties’ choices).

2. Persons, Legal Capacity and Juristic Personality

LAW135D students must understand who can have rights and duties, and with what legal capacity. This underpins contractual capacity, liability in delict, and many exam scenarios involving minors, companies and incapacitated persons.

2.1 Natural Persons: Legal Status and Capacity

A natural person is a human being. Three core concepts:

Legal Subject vs Legal Object
- Legal subject: A person or entity that can hold rights and duties.
- Legal object: Something to which rights relate (e.g., property, intellectual property, services).
Commencement and Termination of Legal Personality
- Commencement:
  - At birth: the child must be born alive and completely separate from the mother.
  - The nasciturus fiction: A conceived but unborn child can be treated as already born for purposes that benefit the child (e.g., inheritance), provided the child is later born alive.
- Termination:
  - At death: when a person dies, their estate vests in their deceased estate, managed by an executor.
Legal Capacity vs Juristic Capacity vs Capacity to Act
- Legal capacity: Ability to be a bearer of rights and duties (all natural persons have this).
- Juristic capacity: Capacity to perform certain juristic acts (e.g., entering a marriage).
- Capacity to act: Ability to perform acts that have legal consequences (e.g., concluding a contract).
- Exams often ask you to define and differentiate these.

2.2 Status and Its Effect on Capacity

Status refers to a person’s legal position in society; it can influence capacity to act. Typical status factors:

Age (minor vs major).
Marital status (in community of property, out of community, customary marriage).
Mental health (unsoundness of mind).
Insolvency (sequestrated estate).
Gender (uncoupled historically, but some older rules still appear in case law).

2.2.1 Age and Capacity

Under the Children’s Act 38 of 2005 and common law principles:

Minor: Under 18 years.
Major: 18 years and older (full capacity to act, unless restricted by other factors).

Capacity of minors:

Under 7 years (infants):
- No capacity to act.
- Cannot conclude contracts or commit delicts in law (though parents may be liable under certain circumstances).
7 to 17 years (older minors):
- Limited capacity to act.
- Can perform juristic acts with the assistance of a guardian (usually a parent).
- Some acts (e.g., certain employment contracts or small cash transactions) may be valid without assistance, depending on the nature and benefit to the minor.

Guardianship:

Guardian consents or assists with major legal transactions (e.g., selling property, signing surety).
Without required consent, the contract is usually void or voidable, depending on the circumstances.

Exam example:

A 16‑year‑old learner from TUT’s accounting school signs a 3‑year expensive gym contract without parental consent. Is it enforceable? Discuss the minor’s capacity, the nature of the transaction, and possible remedies.

2.2.2 Mental Capacity and Intoxication

Persons may lack capacity due to unsoundness of mind or severe intoxication.

If a person cannot understand or appreciate the consequences of their actions at the time of contracting, the contract may be voidable or void, depending on good faith and whether the other party knew of the incapacity.
Courts distinguish between:
- Continuous mental illness (e.g., someone under curatorship).
- Temporary incapacity (e.g., extreme intoxication at the time of signing).

For internal auditors:

Contracts signed by severely intoxicated directors may raise validity concerns and affect the recognition of obligations and liabilities.

2.3 Juristic Persons: Companies and Other Organisations

A juristic (artificial) person is an entity that the law recognises as having legal personality separate from its members.

Common juristic persons relevant to LAW135D and internal auditing:

Companies (registered under the Companies Act 71 of 2008).
Close corporations (existing, but not new ones created).
Co‑operatives.
Non‑profit companies / NGOs.
Municipalities, universities, public entities (e.g., some state‑owned enterprises under the PFMA).

Characteristics of juristic persons:

Separate legal personality
- Can own property, enter contracts, sue and be sued in its own name.
- Limited liability: Typically shareholders are not personally liable for company debts (subject to piercing the corporate veil).
Perpetual succession
- The company continues even if shareholders or directors change or die.
Creation
- Through registration (e.g., with the Companies and Intellectual Property Commission – CIPC).
- Through statute (e.g., certain public entities).
- Through the Constitution (for constitutional bodies).
Organs and Agents
- Juristic persons act through:
  - Organs: Board of directors, council, management.
  - Agents: Employees or representatives (authority can be express or implied).

Implications for internal auditing:

Auditing focuses on the entity, not individuals, although individuals may be held liable for misconduct.
Understanding the separate personality and limited liability concept is essential when assessing contingent liabilities and related‑party transactions.

2.4 Piercing the Corporate Veil

In certain circumstances, courts may disregard the separate legal personality of a company to hold shareholders or directors personally liable.

Common reasons:

Fraud, sham or device to avoid legal obligations.
Abuse of the corporate form contrary to public policy or statutory provisions.
Companies Act 71 of 2008 permits courts to declare directors delinquent or hold them personally liable in specific circumstances (e.g., reckless trading, breach of fiduciary duties).

Exam application:

A company used as a vehicle to defraud creditors: describe how a court might pierce the veil and the consequences.

2.5 Domicile, Residence and Citizenship

For some legal questions (jurisdiction, applicable law, tax), it is necessary to distinguish:

Domicile: The place where a person has their permanent home or intends to permanently reside.
Residence: Where a person lives at a given time (may be temporary).
Citizenship: Legal bond to a state (South African citizen or not).

These influence:

Which law applies (e.g., in marriage and succession).
Which court has jurisdiction.
Students must recognise these concepts, even if not examined in depth in LAW135D.

2.6 Capacity in Business and Internal Auditing Context

From a TUT National Diploma: Internal Auditing viewpoint:

Before auditing contracts or transactions, ensure:
- Parties had capacity to contract (e.g., minors properly assisted, company properly represented by authorised signatory).
- No statutory limitations (e.g., public entities restricted from certain borrowings without approval).
Failures in capacity can lead to:
- Void/voidable contracts, affecting revenue recognition and liabilities.
- Potential findings in audit reports about irregular expenditure or fruitless and wasteful expenditure in the public sector.

3. Law of Contract: Formation, Validity and Breach

Contract law is central in LAW135D, UNISA’s CLA1501/CLA2601 and CUT commercial law modules. Exams commonly present problem questions asking whether a valid contract exists, whether it was breached, and what remedies follow.

3.1 Essentials of a Valid Contract

To be valid, a contract in South African law generally requires:

Consensus (agreement).
Capacity to act (both parties must have capacity).
Legality (lawful purpose and performance).
Possibility of performance.
Formalities (where required by law or agreement).
Certainty (terms must be sufficiently definite).

For LAW135D, focus especially on consensus, legality, and formalities.

3.2 Consensus: Offer and Acceptance

Consensus means there is a meeting of the minds on the essential terms of the contract.

3.2.1 Offer

An offer is a proposal made with the intention that, upon acceptance, a binding contract will result.

Requirements:

Must be clear, complete, and serious.
Can be oral, written, or by conduct.
Can be made to:
- One person (e.g., a quotation).
- A class of persons (e.g., “students at TUT Internal Auditing Department”).
- The public at large (e.g., advertisements — though usually they are invitations to treat, not offers, unless very specific).

Invitations to treat are invitations to negotiate (e.g., shop displays, price lists). They are not offers.

Termination of offers:

By revocation (before acceptance, communicated properly).
By rejection (including counter‑offers).
By lapse of time (if time period specified or reasonable time passes).
By death or insolvency of offeror (depending on circumstances).

3.2.2 Acceptance

Acceptance is the unqualified, unconditional assent to the terms of the offer.

Requirements:

Must be unconditional and conform to the offer.
Must be communicated to the offeror (unless waived).
Must be by the prescribed method (if specified) or by a reasonable method.
Silence is not acceptance (unless there is a prior understanding making it so).

Place and time of contract formation:

In the absence of special stipulations, contracts are generally concluded where and when the acceptance is received by the offeror.
The postal rule (acceptance effective upon posting) may sometimes apply, although electronic communications and modern statutes (e.g., Electronic Communications and Transactions Act 25 of 2002) have modified this.

Exam example:

A TUT student sends an email offer to supply tutoring services. The recipient accepts via WhatsApp. When and where was the contract concluded?

3.3 Factors Vitiating Consent

Even if there appears to be agreement, the contract may be invalid or voidable if consensus is flawed:

Misrepresentation.
Duress (fear).
Undue influence.
Mistake.

3.3.1 Misrepresentation

A misrepresentation is a false statement of fact that induces a party to enter the contract.

Types:

Innocent misrepresentation: False statement made without intent to deceive.
Fraudulent misrepresentation: Knowingly false, with intent to deceive.
Negligent misrepresentation: False statement made carelessly.

Requirements:

False statement of past or present fact (not opinion or future intention, unless misrepresented as fact).
Made by or attributable to the other contracting party.
Induces the contract (material and causal).

Remedies:

Rescission (cancellation) of the contract.
Damages (especially for fraudulent or negligent misrepresentation, often delictual).

Internal auditing context:

Misrepresentation in financial statements (e.g., over‑stated assets) may lead to misinformed contracts with investors or suppliers, raising potential legal claims for misrepresentation and damages.

3.3.2 Duress and Undue Influence

Duress (metus):
- Unlawful or improper pressure (e.g., threats of violence) that induces a party to contract.
- Contract is voidable at the instance of the party under duress.
Undue influence:
- Abuse of a position of trust or authority to obtain an unfair advantage.
- Common in relationships like trust between attorney‑client, parent‑child, spiritual leader‑follower.
- Contract can be set aside if undue influence is proven.

3.3.3 Mistake

Mistake may prevent true consensus and invalidate a contract, depending on type:

Common mistake: Both parties share the same mistaken belief about a vital fact or law.
Mutual (reciprocal) mistake: Parties misunderstand each other (each has a different version of the agreement).
Unilateral mistake: Only one party is mistaken; the other knows or should know about it.

Not all mistakes will void a contract. Courts distinguish between:

Material mistakes (essential to the contract) vs non‑material.
Mistakes due to negligence vs more excusable errors.

Exam tip:

Problem questions may ask if there is a consensus error (no true agreement) or a separate ground for relief (e.g., misrepresentation or undue influence). Be ready to reason logically.

3.4 Legality and Formalities

3.4.1 Legality

A contract must have lawful content and not be against:

Statute: e.g., agreements to commit an offence, lending at interest rates above statutory limits.
Public policy: e.g., contracts prejudicing the administration of justice, restraint of trade that is unreasonable.

If illegal:

Contract may be void from the beginning.
Courts may refuse to enforce it (“ex turpi causa non oritur actio” — no action arises from an immoral cause).

For internal auditors:

Contracts violating public finance laws (e.g., MFMA contraventions) may be unenforceable and give rise to findings on irregular or unauthorised expenditure.

3.4.2 Formalities

Some contracts must comply with statutory formalities to be valid or enforceable:

Alienation of Land Act 68 of 1981:
- Sale of land must be in writing and signed by the parties or their agents.
National Credit Act 34 of 2005:
- Consumer credit agreements often require written form with specific disclosures.
Suretyship:
- Contracts of suretyship generally must be in writing and signed.

If required formalities are not complied with:

Contract may be void or unenforceable (depending on the statute).

Parties can also agree on their own formalities (e.g., “this contract will be valid only once signed by both parties”). If this is done, compliance becomes a contractual requirement.

3.5 Performance, Breach and Remedies

Once a valid contract is formed, parties must perform as agreed. Failure to do so may constitute breach.

3.5.1 Types of Breach

Mora debitoris (late performance by debtor):
- Debtor fails to perform on time.
- Creditor can claim performance (plus damages) or in some cases cancel if time was of the essence.
Mora creditoris (creditor’s delay):
- Creditor prevents debtor from performing or refuses proper tender of performance.
Repudiation:
- One party, by words or conduct, shows an unequivocal intention not to be bound by the contract.
- Innocent party may:
  - Accept repudiation and cancel.
  - Reject repudiation and insist on performance.
Prevention of performance (impossibility due to debtor’s fault):
- Performance becomes impossible due to debtor’s fault (e.g., deliberate destruction of goods to avoid delivery).
Defective performance:
- Performance not in accordance with terms (e.g., goods of inferior quality).

3.5.2 Remedies for Breach

Typical remedies:

Specific performance:
- Court orders the defaulting party to perform as promised.
Cancellation (rescission):
- End the contract and claim restitution (return of performance already rendered).
- Usually reserved for material (serious) breaches.
Damages:
- Monetary compensation to place the injured party in the position they would have been in if the contract had been properly performed.
- Must prove:
  - Breach.
  - Loss (financial).
  - Causation (link between breach and loss).
  - Remoteness (loss must not be too remote).
Penalty / Liquidated damages:
- Agreed amount payable upon breach (subject to the Conventional Penalties Act 15 of 1962, which allows courts to reduce penalties that are out of proportion to the prejudice).

Internal auditing link:

Auditors must understand breach and remedies to assess:
- Potential contingent liabilities from breached contracts.
- Adequacy of provisions for damages or penalties.
- Whether management has complied with contractual obligations.

4. Law of Delict: Wrongful Acts and Liability

In LAW135D and related modules, the law of delict deals with civil wrongs that cause damage. Many exam questions involve negligence, vicarious liability and pure economic loss, all relevant to internal auditing when assessing operational risk and legal exposure.

4.1 Delict vs Contract vs Crime

Delict:
- A wrongful, culpable act (or omission) causing damage to another, for which the law provides a remedy (usually damages).
Contract:
- Based on agreement between parties; liability arises from breach of agreed terms.
Crime:
- Wrong against society; prosecuted by the state; punishment rather than compensation.

Overlap examples:

A manager at a TUT‑linked company commits fraud:
- Crime: Fraud (criminal prosecution).
- Delict: Company sues for damages suffered due to the fraud.
- Contract: Breach of employment contract and fiduciary duties.

4.2 Elements of Delict in South African Law

Classic elements:

Conduct.
Wrongfulness.
Fault (culpa or intent).
Causation.
Harm (damage).

All must be present for delictual liability, subject to specific variations (e.g., strict liability).

4.2.1 Conduct

Positive act (e.g., driving a car recklessly).
Omission (failure to act) can be delictual where there is a legal duty to act.

Legal duty to act arises from:

Statute (e.g., safety obligations).
Contract (e.g., security company’s duty to guard).
Undertaking to protect another.
Control over a dangerous situation.

4.2.2 Wrongfulness (Unlawfulness)

Wrongfulness is determined through objective reasonableness and legal policy.

For positive acts, an infringement of a legally recognised interest (person, property, reputation) is prima facie wrongful.
For omissions and pure economic loss, courts look at whether a legal duty existed, reflecting constitutional norms and policy considerations.

Examples:

Wrongful:
- Negligent driving causing injury (duty to drive carefully).
- Publishing defamatory statements without justification.
- Negligent misstatement causing financial loss where a duty existed (e.g., auditors’ reports in some cases).
Not wrongful:
- Competitive trade leading to loss but within legal bounds.
- Failing to rescue a stranger in danger when no special relationship or duty exists (but nuanced in modern law).

4.3 Fault: Intention and Negligence

Fault (§culpa) means blameworthiness and can take the form of intention or negligence.

Intention (dolus):
- The wrongdoer directly intends the harmful result, or foresees it as a possible consequence and reconciles themselves to it.
- More common in criminal law, but also relevant in delicts like intentional defamation, assault.
Negligence:
- Evaluated using the reasonable person test:
  - Did the person fail to act as a reasonable person would under the circumstances?
- Main questions:
  1. Would a reasonable person have foreseen the possibility of harm?
  2. Would a reasonable person have taken steps to guard against it?
  3. Did the defendant fail to take those steps?

In internal auditing:

Negligence can arise in professional services (e.g., auditors, accountants, financial advisors).
Failure to exercise due professional care may lead to delictual claims for economic loss.

4.4 Causation and Harm

4.4.1 Causation

Two dimensions:

Factual causation:
- “But‑for” test: But for the defendant’s conduct, would the harm have occurred?
- If not, factual causation is present.
Legal causation:
- Concerns the scope of liability.
- Courts use flexible approaches (e.g., remoteness, reasonable foreseeability, direct consequences) to decide if it is fair and reasonable to hold the defendant liable.

Example:

A negligent misstatement in financial statements causes an investor to buy shares and later suffer loss when the company collapses.
- Factual causation: But for the misstatement, the investor might not have invested.
- Legal causation: Court weighs policy factors (e.g., protecting investors vs unlimited liability) before deciding on liability.

4.4.2 Harm (Damage)

Types of harm:

Patrimonial (financial) loss:
- Loss of existing assets or expenses incurred (e.g., repair costs).
- Loss of future income (loss of earning capacity).
Non‑patrimonial loss:
- Pain and suffering, emotional shock, loss of amenities of life.
Pure economic loss:
- Financial loss not directly related to injury to person or property (e.g., negligent misstatement).

In internal auditing:

Auditors should recognise that pure economic loss is a high‑risk area, especially in advising on financial reporting and controls. Courts are cautious but increasingly open to claims, depending on duty and policy considerations.

4.5 Vicarious Liability

Vicarious liability is where one person (usually an employer) is held liable for delicts committed by another (usually an employee) in the course and scope of their employment.

Requirements:

Employment relationship:
- Employee vs independent contractor (control test, organisational integration, etc.).
Course and scope of employment:
- Delict committed while performing duties or reasonably connected with job functions.

Examples:

An internal auditor employed by a municipality negligently misplaces confidential documents leading to financial loss to a third party. The municipality may be vicariously liable.
A company can be vicariously liable for fraud committed by its financial manager acting within apparent authority.

Relevance:

For internal auditors and risk managers, vicarious liability informs the need for internal controls, training, and professional indemnity insurance.

4.6 Defences in Delict

Common defences:

Contributory negligence:
- Plaintiff’s own negligence contributed to the harm.
- Under the Apportionment of Damages Act 34 of 1956, damages are reduced proportionally.
Voluntary assumption of risk (volenti non fit injuria):
- Plaintiff knew of and accepted the risk, thus cannot claim (or claim is limited).
Consent:
- Valid consent to the conduct (e.g., sports injuries within game rules).
Statutory defences:
- Some statutes limit or exclude liability.

Application:

Courts consider these defences when determining quantum of damages and liability apportionment.

5. Commercial, Corporate and Governance Law Essentials for Internal Auditing

For TUT’s National Diploma: Internal Auditing and LAW135D, foundational knowledge of commercial and corporate law is essential, particularly as it interfaces with internal auditing and corporate governance.

5.1 Basic Business Forms and Their Legal Characteristics

Common South African business forms:

Sole proprietor
- Natural person carrying on business in their own name.
- No separate legal personality; owner bears unlimited personal liability for debts.
Partnership
- Two or more persons carry on business for profit, co‑owning assets and sharing profits.
- Generally no separate legal personality in common law (partners liable jointly and severally).
- Partnerships are often regulated by a partnership agreement.
Company (Companies Act 71 of 2008)
- Private companies (Proprietary Limited – (Pty) Ltd):
  - Cannot offer shares to the public.
  - More flexible regulatory regime than public companies.
- Public companies (Ltd):
  - May offer securities to the public.
  - Stricter governance and disclosure requirements.
Close corporation (CC)
- New CCs can no longer be formed, but existing ones continue.
- Members have limited liability; less formal governance structures.
Non‑profit company
- No shareholders; incorporated for a public benefit or mutual benefit purpose.
State‑owned companies (SOC Ltd)
- Owned by government; subject to additional statutes (e.g., Public Finance Management Act 1 of 1999).

Internal auditors must understand:

The legal structure influences:
- Governance mechanisms (directors vs partners).
- Liability exposure.
- Applicable statutory requirements.

5.2 Directors’ Duties and Corporate Governance

Directors’ duties under the Companies Act and common law are vital for corporate governance and, thus, internal auditing.

Key duties:

Fiduciary duties:
- Act in good faith and in the best interests of the company.
- Avoid conflicts of interest and secret profits.
- Act for a proper purpose (not to entrench themselves or harm stakeholders unfairly).
Duty of care, skill and diligence (s 76, Companies Act):
- Exercise the degree of care and skill reasonably expected of a person:
  - With the director’s knowledge, skill and experience.
  - Carrying out the same functions.
Business judgment rule:
- Protects directors from liability for honest, informed business decisions, even if they turn out badly, provided:
  - They acted in good faith;
  - Had no material conflict of interest;
  - Informed themselves appropriately; and
  - Believed the decision was in the best interests of the company.

Breaches of duty:

Can lead to:
- Directors’ personal liability for loss caused.
- Disqualification or delinquency orders.
- In extreme cases, criminal liability.

Internal auditors’ role:

Assess whether governance structures and practices:
- Support compliance with directors’ duties.
- Ensure adequate risk management, internal control and compliance processes.

5.3 Corporate Governance Frameworks: King IV and PFMA/MFMA

South African governance frameworks:

King IV Report on Corporate Governance for South Africa, 2016:
- Applies on an “apply and explain” basis.
- Principles emphasise:
  - Ethical leadership;
  - Effective control;
  - Good performance;
  - Legitimacy and stakeholder inclusivity.

Key points for internal auditing students:

Internal audit is a governance function, providing independent assurance on:
- Adequacy and effectiveness of risk management.
- Effectiveness of internal controls.
- Compliance with laws and regulations.

Public Finance Management Act 1 of 1999 (PFMA) and Municipal Finance Management Act 56 of 2003 (MFMA):
- Govern financial management in national/provincial departments and municipalities.
- Require:
  - Sound financial controls;
  - Transparent procurement processes;
  - Proper record‑keeping and reporting.
- Internal auditors in public sector must test compliance with PFMA/MFMA requirements and detect irregular, fruitless and wasteful, or unauthorised expenditure.

5.4 Contracts and Procurement in Public and Private Sectors

Procurement contracts are a central audit focus.

Key legal aspects:

Lawful delegation of authority:
- Only authorised persons may sign contracts binding the entity.
Procurement policies and procedures:
- Must align with statutory and regulatory frameworks (e.g., Preferential Procurement Policy Framework Act).
Transparency and fairness:
- Particularly critical in public sector to avoid corruption.

Typical exam‑style scenario:

A municipal manager at a TUT‑linked municipality bypasses tender procedures and awards a R5 million contract to a friend’s company. Consider:
- Legality of the contract.
- Possible administrative law and criminal consequences (corruption).
- Implications for internal auditors (reporting, recommendations, follow‑up).

5.5 Insider Trading, Market Abuse and Auditing

For students leaning toward financial and internal auditing in listed companies:

Insider trading and market manipulation are regulated by legislation (e.g., Financial Markets Act 19 of 2012).
Trading on inside information (price‑sensitive, not publicly available) is prohibited.
Internal auditors help ensure:
- Proper insider lists and restricted dealings.
- Compliance with disclosure obligations.
- Monitoring for unusual trading patterns.

Consequences of violation:

Administrative penalties.
Criminal prosecution.
Civil claims from affected investors.

Internal auditors’ legal awareness helps in identifying and reporting suspicious transactions that could have delictual or criminal consequences.

5.6 Legal Risk Management and Internal Auditing

Internal auditors, especially in TUT’s National Diploma: Internal Auditing context, must integrate legal knowledge into risk management:

Key steps:

Identify legal risks:
- Regulatory non‑compliance (tax, labour, environmental, company law).
- Contractual breaches.
- Delictual exposure (negligence, misstatements, product liability).
- Data protection and privacy (POPIA).
Assess risk:
- Likelihood of occurrence.
- Impact (financial and reputational).
- Existing controls and mitigations.
Design and evaluate controls:
- Policies and procedures.
- Regular legal compliance audits.
- Training and awareness programmes (e.g., anti‑bribery, competition law).
Reporting:
- Prepare audit reports highlighting legal control weaknesses.
- Recommend corrective actions and monitor implementation.

Example:

POPIA compliance audit:
- Examine consent mechanisms, data security controls, third‑party processing agreements.
- Identify gaps that could lead to delictual liability (privacy breaches) and regulatory fines.

6. Exam Strategy and Problem‑Solving Techniques for LAW135D

Although not purely doctrinal, exam technique is critical for success in LAW135D at TUT and similar modules (e.g., UNISA’s CLA1501, CUT’s Commercial Law I).

6.1 Understanding Question Types

Expect:

Theory/knowledge questions:
- Define, list, explain (e.g., “List the sources of South African law”; “Explain the elements of a valid contract”).
Short application questions:
- Brief scenarios asking you to apply a rule (e.g., “A 17‑year‑old enters into a contract—discuss validity”).
Long problem questions / case studies:
- Complex scenario requiring structured analysis.
Essay/discussion questions:
- Evaluate or discuss principles (e.g., “Critically discuss the doctrine of vicarious liability”).

6.2 IRAC Method for Problem Questions

A useful structure is IRAC (Issue, Rule, Application, Conclusion):

Issue:
- Identify the legal problem(s).
- Example: “Whether a valid contract was concluded between X and Y”; “Whether Z is delictually liable for the damage to P.”
Rule:
- State the relevant legal principles and requirements (elements of contract, delict, etc.).
- Provide definitions and conditions clearly and systematically.
Application:
- Apply each element of the rule to the facts.
- Argue both sides where appropriate.
- Use logical reasoning and link back to statutory provisions or case principles you know.
Conclusion:
- Provide a clear, reasoned answer (Yes/No, liable/not liable, valid/invalid).

Example short IRAC (for a minor’s contract):

Issue: Whether the contract concluded by a 16‑year‑old without parental consent is enforceable.
Rule: Minors between 7 and 17 have limited capacity and generally require guardian assistance for binding contracts.
Application: The 16‑year‑old concluded a long‑term, onerous contract without any guardian involvement; no statutory exception applies.
Conclusion: The contract is likely voidable at the instance of the minor; the other party cannot insist on performance.

6.3 Common Pitfalls and How to Avoid Them

Confusing legal concepts:
- E.g., mixing up delict with crime, or contract with delict.
- Solution: Learn clear definitions and practice distinguishing them.
Not structuring answers:
- Unstructured paragraphs make it hard for markers to see your reasoning.
- Solution: Use headings/sub‑headings, bullet lists where appropriate, and IRAC.
Skipping the application step:
- Many students write the law but don’t apply it to the facts.
- Solution: Explicitly link each legal element to specific facts given.
Not citing authority (where expected):
- For higher‑level exams (and sometimes in LAW135D), mention key cases or statutory sections where possible.
Poor time management:
- Spending too long on one question and rushing the rest.
- Solution: Allocate time per mark; practice timed past papers.

6.4 Revision Strategy for LAW135D and Related Modules

To prepare effectively:

Master core themes:
- South African legal system and sources of law.
- Persons and legal capacity.
- Basic contract law (formation, validity, breach, remedies).
- Basic delict (elements, negligence, vicarious liability).
- Corporate and governance framework (Companies Act basics, PFMA/MFMA, King IV).
Summarise each topic:
- Create your own condensed notes for quick review.
- Use diagrams for structures (e.g., court hierarchy, contract elements).
Practice problem questions:
- Use previous TUT LAW135D exam papers or UNISA CLA1501 tutorials (where allowed).
- Mark yourself critically using IRAC.
Integrate with internal auditing knowledge:
- Relate legal principles to audit procedures and findings.
- Think in terms of legal risk and control evaluation.
Study relevant statutes:
- At least become familiar with:
  - Constitution (especially Bill of Rights basics).
  - Companies Act 71 of 2008 (directors’ duties, corporate personality).
  - PFMA/MFMA (for public sector).
  - POPIA basics (data protection).
  - Alienation of Land Act (for formalities questions).
- You do not need to memorise every section number but should know major concepts and how they operate.
Group discussions and scenario practice:
- Work through hypothetical scenarios with classmates, especially those in National Diploma: Internal Auditing.
- Try to identify issues as an internal auditor and as a law student.

These notes align with fundamental outcomes for LAW135D: Law I at institutions such as Tshwane University of Technology (TUT) and offer strong support material for parallel modules at UNISA and CUT. A solid understanding of these principles equips internal auditing students not only to pass exams but also to recognise and address legal risk in professional practice.