Abstract
On 17 June 2020 the Constitutional Court handed down judgment in Beadica 231 CC and Others v Trustees for the time being of the Oregan Trust and Others (2020) ZAC 13, and provided its position on the proper constitutional approach to the judicial enforcement of contractual terms, and, in particular, the public policy grounds upon which a court may refuse to enforce these terms. Furthermore, it clarified what role the values of fairness, reasonableness and good faith play in our law of contract.
Since the Constitution was adopted, a series of cases have been decided by the Supreme Court of Appeal and the Constitutional Court on the issue of when courts may refuse to enforce a contract or contractual terms. The judgment notes that there is a widely held view that there is a growing divergence in the approaches to this issue between the two courts and that this had lead to problematic and undesirable uncertainty.
Judge Theron dismissed the Application and endorsed the Supreme Court’s position on the issue, thereby providing much needed clarity. It has now been finally stated that abstract values do not provide a free-standing basis upon which a court may interfere in contractual relationships. Values such as reasonableness, fairness, and good faith are not free standing requirements for a contact to be valid, and, importantly, parties cannot escape the consequences of a contract by simply arguing that the contract or its enforcement is unfair, unreasonable, or that the other party acted in bad faith.
Courts still have the power to refuse to enforce a contract if its terms are patently contrary to public policy or if its enforcement in the particular circumstances is contrary to public policy. Constitutional values and the values of fairness, reasonableness, and good faith inform what public policy is and what it requires (and in this way, those values continue to play a role in contract law). The decision aims to balance the competing goals of fairness and certainty by guiding courts to use the power to invalidate a contract or not to enforce it, sparingly and only in the clearest of cases in which harm to the public is substantially incontestable and does not depend on the idiosyncratic inferences of a few judicial minds.
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Factual Background
The Applicants were four Close Corporations, the members of which were former senior employees of Sales Hire CC (‘Sales Hire’). The Applicants, together with Sales Hire and the National Empowerment Fund (‘the Fund’), entered into a Black Economic Empowerment initiative, in terms of which the Fund concluded franchise agreements with Sales Hire; the Fund undertook to finance the Applicant’s acquisition of the franchise businesses, and Sales Hire undertook to train the Applicants to operate their businesses. The Applicants concluded lease agreements with Trustees of the Oregan Trust (one Trustee was Mr Sale, the sole member of Sales Hire) who owned the premises from which the businesses would be operated.
The relevant agreements were substantially similar for all the Applicants. The lease agreements had an initial period of five years, and the Applicants had an option to renew for a further five year period by providing six months written notice before the expiry of the first period. The Applicants did not send the written notice in time. Rather, they indicated their intention to renew about three months before the expiry of the first period. The Trustees of the Oregan Trust gave notice to the Applicants to vacate the premises, stating that the leases were not validly renewed and would therefore come to an end. The Applicants made application in the Western Cape High Court alleging that the lease agreements had been validly renewed. Judge Davis, relying on the decision of Botha and Another v Rich N.O. and Others 2014 (4) SA 124 (CC) as authority that our law of contract requires that a sanction for a breach be proportional to the breach, refused to strictly apply the renewal clause, as to do so would lead to the collapse of the whole initiative – a disproportionate sanction for the failure to provide timeous notification.
The High Court’s decision was appealed and overturned by the Supreme Court, which rejected the notion that a disproportionate sanction for breach of contract, or failure to comply with the terms of a contract, is unenforceable. The Supreme Court stated, which it had consistently done, that fairness and reasonableness are not self-standing principles or requirements for contracts, and that courts may decline to enforce to enforce contractual terms which are, or the enforcement of which would be, contrary to public policy and may only do so sparingly and in the clearest of cases. This has come to be referred to as the ‘perceptive restraint’ principle. The Supreme Court found that the renewal clause was not itself unfair or unreasonable, and the Applicants had not provided any facts that made the failure to comply with the renewal clause contrary to public policy, and in those circumstances, the court could not refuse to enforce it.
On a further appeal to the Constitutional Court, it was alleged by the Applicants that the strict enforcement of the renewal clause and the cancellation of the lease agreements, would be contrary to public policy and inimical to the values of the Constitution, citing in particular Section 9 of the Constitution (the right to equality).
Decision of the Constitutional Court
The Constitutional Court analysed the historical development of the law in South Africa on the issue of judicial enforcement of contracts and stated that its decision in Barkhuizen v Napier 2007 (5) SA 323 (CC) remains the leading authority in our law on the role of equity in the law of contract. Barkhuizen provided that where a clause or the enforcement of a clause is challenged, courts must consider firstly whether the clause itself is unreasonable, and secondly, if it is not, whether its enforcement in the particular circumstances would be contrary to public policy. It also held that good faith was not a self-standing requirement for contracts to be valid.
The Constitutional Court then clarified its previous decisions (particularly that of Botha and Everfresh Market Virginia (Pty) Ltd v Shoprite Checkers (Pty) Ltd 2012 (1) SA 256 (CC) and stated that that the divergence in approaches between the Supreme Court and the Constitutional Court was perceived and apparent and that there is in fact agreement between the two courts on the proper approach to the judicial enforcement of contracts. It supported and endorsed what the Supreme Court has considered to be the most important principles governing the judicial control of contract through the instrument of public policy. These principles provide useful guidance to practitioners who may face the question of whether a particular contract is valid or enforceable:
- Public Policy demands that contracts entered into freely and consciously must be honoured;
- A court will declare invalid a contract that is prima facie inimical to a constitutional value or principle, or otherwise contrary to public policy;
- Where a contract is not prima facie contrary to public policy, but its enforcement in particular circumstances is, a court will not enforce it;
- The party who attacks the contract or its enforcement bears the onus to establish the facts;
- A court will use the power to invalidate a contract or not to enforce it, sparingly, and only in the clearest of cases in which harm to the public is substantially incontestable and does not depend on the idiosyncratic inferences of a few judicial minds;
- A court will decline to use this power where a party relies directly on abstract values of fairness and reasonable to escape the consequences of a contract because they are not substantive rules that may be used for this purpose.[1]
The Constitutional Court held that the values of reasonableness and fairness, as well as ‘good faith’ and ‘ubuntu’ and other abstract constitutional values are not free-standing requirements upon which parties can rely to challenge the validity or enforceability of contracts or contractual terms. Rather, those values inform what public policy is; they underlie the substantive law of contract by playing a controlling and legitimating function.
The Constitutional Court agreed with the Supreme Court that because Applicants had not provided sufficient facts for why they failed to comply with the renewal clause, the clause was enforceable. The Applicants explanation that they were unsophisticated and not versed in the niceties in the law was not accepted as a valid reason for the failure to comply with the renewal clause. Had the Applicants provided other (or more compelling) facts and reasons for why the renewal clauses were not complied with, the Constitutional Court may have granted the application. It will be interesting to see, in future cases, what type of reasons courts will accept as making the contract or its enforcement contrary to public policy.
Conclusion
The decision provides much needed clarity. Like the Supreme Court, The Constitutional Court recognized that the Rule of Law requires that the law must be clear and ascertainable so that those bound by the law may regulate their conduct accordingly and so the principle of pacta sund servanda (that contracts freely and voluntarily entered into must be honored) should not be undermined. However, there is also the necessity that courts’ decisions remain legitimate, and that the competing goals of certainty and fairness are balanced accordingly. To this end, courts still have the power to refuse to enforce certain contracts in accordance with the ‘perceptive restraint principle’.
As Judge Froneman points out in his dissenting judgment, the perceptive restraint principle itself contains abstract standards, and so it can be argued that uncertainty has not been completely eliminated.
It has however been made clear that parties cannot escape the consequences of their contract by simply arguing that the contract or its enforcement is unfair, unreasonable or contrary to constitutional values. And there is no requirement that the sanction for a breach of contract must be proportionate to the breach. In order to convince a court to use its power to invalidate or refuse to enforce a contract, it appears that parties must provide compelling facts to show that theirs is one of ‘the clearest of cases’ in which ‘harm to the public is substantially incontestable and does not depend on the idiosyncratic inferences of a few judicial minds.’
[1] Pridwin Supreme Court Judgment
By Patrick Gilfillan
Associate: Commercial and Business Law
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