bank v grusd revisited | 31 March 2011

bank v grusd revisited

by Armando Aguiar and Dean Ehrlich

The case of Bank v Grusd 1939 TPD 286 is a case based in contract law in a construction context. Its factual basis is simple, involving a counterclaim by a building contractor against an owner:1

  1. The owner and building contractor verbally agreed to the performance of extra work not specified in their written contract in exchange for a reasonable price.2

  2. However, their written contract provided that no extra work was to be done except with the owner's written authority.3

  3. The purpose of this clause was to protect the owner from unilateral variations of the contract by the building contractor by limiting the parties' rights to verbally vary the contract.4

  4. The building contractor duly performed the extra work, but in the heat of the construction had failed to obtain written authority.5

  5. Relying on the terms of the written contract, the owner seized the opportunity not to pay.

Overruling the finding of the court below, the court held that it would be wrong to allow such a strict interpretation of the contract.6 The court observed, with reference to other case law,7 that too strict an interpretation might result inequity;8 or unfairness. Therefore, the court identified that the key factors in determining the correct and fair interpretation of the clause were the presence of: 9

  1. Knowledge on the part of the owner; and

  2. A benefit to the owner (in other words, the work must have been necessary).

The court held that where additional work outside of contractual specifications is performed without the full knowledge of the owner, reliance on such a clause would not be wrong;10 the clause operates to protect the owner from just such an occurrence. However, where an owner knowingly agrees to additional work, he cannot rely on the technical point that it was not agreed to in writing in order to avoid paying for the work which benefits him;11 such would be tantamount to fraud.12

But is the principle contained in this provincial level case reported in 1939 still good law?

The Bank case has never been expressly overruled. The principle in Bank was distinguished (shown not be applicable) in the case of Frame v Palmer1950 (3) SA 340 (C) in which the court held as a result of contractual privity that:

"the defendant never accepted the work as being rendered directly to her by the plaintiff. It was not, as in ... Bank v. Grusd (1939, T.P.D. 286), a case of an owner standing by, letting the contractor render work directly to him which was not stipulated for in the contract, and then taking the benefit thereof, while refusing to pay for it. Here there was nothing in the defendant's conduct which was inconsistent with an acceptance by her of the work as being rendered to her under her contract [with a third party]" 13

Similarly in the case of Shifren and Others v SA Sentrale Ko-op Graanmaatskappy Bpk 1964 (2) SA 343 (O), the principle in Bank was distinguished as follows:

"In the instant case there is no suggestion of fraud or bad faith and Bank's case is therefore distinguishable on that ground."14

"Bad faith" appears to refer to a dishonest owner seeking to subvert substance through form by attempting to rely on the bare words of contract rather than honouring the verbal undertaking he knowingly gave in order to avoid paying for the benefit he in fact received.

The use of "bad faith" in Shifren was derived through reference to an earlier case, Sotiriadis v Patel 1960 (2) SA 812. Sotiriadis examined the principle in Bank holding that it to be based on the proposition that:

"it would be bad faith on the part of the owner in the circumstances to be enabled to refuse to pay for the extra work." 15

However, the principle in Bank was not applied in that case.16 Although Sotiriadis dealt with a lease of land and a landlord opting to rely on the strict terms of his contract rather than extend an indulgence he had given the lessee in the past (allowing him to pay late),17 the fact that the landlord had not been paid on time in accordance with the contract cannot be construed as "benefit" capable of preventing his strict reliance on the words of his contract.

In light if the above it can authoritatively be said that because Bank has never been expressly overruled, its principle is still to be considered binding and extremely persuasive, even beyond the former Transvaal Province, as other courts have not refused its application outright, but have instead carefully distinguished the cases before them in order to avoid having to apply it. Furthermore, it is clear that the two factors of which the Bank principle is composed are always to be applied in tandem: there must be simultaneously knowledge on the part of the owner as well as a benefit to the owner in order to prevent an owner relying on his written contract. If either factor exists in isolation the owner may refuse to pay in accordance with his contract, as occurred in the cases distinguishing themselves from the Bank principle above.

Given the express references to equity18 and fraud19 in Bank and the mentioning of bad faith by courts considering the principle it laid down,20 the controversial concept of "good faith" can be said to substantially underpin the Bank decision. A full examination of the continued relevance of the Bank principle would not be complete without a consideration of the decision of Barkhuizen v Napier 2007 (7) BCLR 691 (CC). In this case the Constitutional Court engages with the concept of "good faith" and its role in interpreting South African contracts, within the context of a time-bar clause contained in a standard form insurance contract.

The Barkhuizen case is composed of, inter alia, two key judgments. The judgment of Justice Ngcobo, writing for the majority, held in relation to "good faith" in contract law the following:

  1. "Good faith is not a self standing rule, but an underlying value that is given expression through the existing rules of law;"

  2. "Good faith... has a creative, a controlling and a legitimating or explanatory function. It is not, however, the only value or principle that underlies the law of contracts." 22

  3. "... the applicability of [good faith] will depend on the reason advanced for non-compliance [with a contractual clause]" 23

After laying out the above guidelines the court held that the applicant had not provided the court with sufficient reasons for the contractual clause not to apply. 24

Justice Sachs gave the concept of "good faith" (within his exploration of public policy) a more extensive treatment in his minority dissenting judgment, holding as follows:

  1. "Agreements which are clearly inimical to the interests of the community, whether they are contrary to law or morality, or run counter to social or economic expedience, will accordingly, on the grounds of public policy, not be enforced." 25

  2. "...public policy should properly take into account the doing of simple justice between man and man." 26

  3. "I will accordingly seek to establish relevant objective factors that might provide pointers to what public policy requires..." 27

Justice Sachs, therefore, looked to international practice regarding standard form contracts; the proposed Consumer Protection Bill; academic opinion and relevant statutory provisions. The position of these objective factors led him to conclude that:

"...public policy animated by the Constitution dictates that the time-bar clause in question... should not be enforced." 28

Whilst the factors he considered in reaching his conclusion were uniquely relevant to the circumstances of the case, what is undeniably transferable to any case is that any factors speaking to the non-enforceability of a contract's clause, whatever they may be in the circumstances of a particular case, must be objective indicators of public policy.

What both of the aforementioned judgments make clear is that public policy and good faith are to be determined with reference to objective factors or, in the words of the majority, the reasons advanced for non-compliance. Accordingly, the effect of the judgment is not to negate the underpinning of Bank. In actuality, Bank can be interpreted into the twenty-first century and aligned with finding of the Constitutional Court in Barkhuizen along the following lines:

  1. Good faith and the "doing of simple justice between man and man" allow for a contract's clauses to be interpreted less strictly.

  2. Reasons for non-compliance, or objective factors pointing to public policy, must be advanced in order to qualify for a less strict interpretation;

Bank and Grusd is as good in the 21st century as it was in 1939 and should, when the need arises, be revisited and relied upon.

1 Bank v Grusd 1939 TPD 286 at 286.
2 Bank supra at 288.
3 Bank supra at 287.
4 Bank supra at 288.
5 Bank supra at 287
6 Ibid.
7 Hill v The South Staffordshire Railway Company (12 LT 63).
8 Bank supra at 287.
9 Bank supra at 288.
10 Ibid.
11 Ibid.
12 Bank supra at 287.
13 Frame v Palmer 1950 (3) SA 340 (C) at 348.
14 Shifren and Others v SA Sentrale Ko-op Graanmaatskappy Bpk 1964 (2) SA 343 (O) at 346.
15 Sotiriadis v Patel 1960 (2) SA 812 at 816.
16 Ibid.
17 Sotiriadis supra at 813
18 Bank supra at 287.
19 Ibid.
20 Shifren supra at 346 and Sotiriadis supra at 816.
21 Barkhuizen v Napier 2007 (7) BCLR 691 (CC) at paragraph 82.
22 Hutchinson “Non-variation clauses in contract: an escape from the Shifren straitjacket?” (2001) 118 SALJ 720 at 743-4 in Barkhuizen supra at paragraph 82.
23 Barkhuizen supra at paragraph 83.
24 Barkhuizen supra at paragraph 84.
25 Barkhuizen supra at paragraph 158.
26 Jajbhay v Cassim 1939 AD 537 at 544 in Barkhuizen supra at paragraph 159.
27 Barkhuizen supra at paragraph 161.
28 Barkhuizen supra at paragraph 185.

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