The value of the market price in contracts of sale: An analysis

Citation(2023) 9(1) JCCL&P 1
Published date15 November 2023
AuthorNkoane, P.
Date15 November 2023
Senior Lecturer: College of Law, University of South Africa
Every rule should be valuable to the law. More so if the rule affects the
commercial interest of society. A rule may be adopted or formulated
to regulate commercial transactions, particularly to support the
efficiency of the market. The market price rule is formulated to
measure the degree of damages a contract defaulter should pay. The
rule should indeed be applied consistently and reasonably to avoid
uncertainty and unfairness. It follows that the market value as a rule
and measure of commercial liability should not escape analysis to
determine its limitations and value in contracts of sale. Thus, this
article aims to provide a thorough discourse on the market price rule
and how it should be applied in contracts of sale. The purpose of this
article is to provide a comprehensive exposition of what informs the
market price and how the market price affects the determination of
damages in contracts of sale.
Keywords: contracts, market price rule, damages, causation,
contractual disputes
The idea behind the market price rule is that markets provide certainty
and, as such, are a much better measure of damages in contracts of
sale.1 The essential point is to determine how the market affects the
values of commodities and how that connects with the determination
of damages. The courts often adopt this method in assessing damages
claimable vis-à-vis cases of breached contracts. The courts generally
apply a method that the contracting parties could have adopted to
BCom LLB (Unisa) LLM (UCT). This article is based on my LLB dissertation
written as an elective module of the syllabus of the same qualification.
1 Although the application of the market price rule is well established, the topic
lacks dedicated comprehensive writing in the South African law. As a result, this
article investigates this topic in a holistic manner to determine its relevance in
the modern-day contract of sale.
(2023) 9(1) JCCL&P 1
© Juta and Company (Pty) Ltd
measure damages upon breach of contract. It is often submitted that
in an open market with prevailing market prices, the market price
rule satisfies this supposition.2 This is particularly true in cases where
parties have not expressly adopted a method of choice to determine
liability in their contract. The courts essentially apply the market
price rule to estimate and limit damages and secure legal certainty
and equity. The article focuses on contracts of sale and discusses the
applicable rules where damages are sought for breach of contract.
It is intended to illustrate the significance of this rule and how the
courts have applied it to concrete cases.
Although the market price rule is well-established in South African
law, its application was deemed to be problematic in some of the past
cases. The court in the Cowley v Hahn3 case intimated that the market
value can simply be determined by the resale of the merx. The author
challenges this view as a misapplication of the rule, which may lead
to various problems. Adding to the problematic application of the
market price rule is the drop in business ethics, which is accompanied
by questionable business practices. The questionable business
practices have compelled change in other forms of law.4 This article
demonstrates the inadequacies of the market price rule, particularly
its application in markets that are littered with profiteering schemes,
which is an issue that has not been tested in the context of this rule
It is marked that in contracts of sale, the market price rule
underscores the importance of having mechanisms that buttress
equity and legal certainty. The article aims to illustrate that even
though the market price rule is a useful measure, there are instances
where it may be inapplicable, and this would require the court to
consider other measures. The article is divided into concentrated
sections. This arrangement is adopted for the sake of convenience.
The aim is to facilitate a better understanding of the topics contained
in each section. Moreover, the author aims to avoid blending
multifarious issues into a single quagmire of text.
2 Dale Hutchison & Chris Pretorius (eds) The Law of Contract in South Africa 3 ed
(2017) 346–7.
4 For example, the amendments of the Competition Act 89 of 1998 to improve the
laws that are intended to frustrate cartels and the improvements of tax laws to
facilitate tax compliance and to diminish tax evasion.
5 The market price rule cannot be used where there is no open market, see para-
graph V below.
© Juta and Company (Pty) Ltd

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