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dispute resolution | 18 Jun 2020
BY Aslam Moosajee AND Joshua Davis
newsflash

dispute resolution


Constitutional Court: Fairness, reasonableness and proportionality are not free-standing principles to invalidate a contract or prevent the enforcement of its terms

On 17 June 2020, the Constitutional Court handed down an important judgment providing clarity on the contested question of the correct approach to fairness in South African contract law.

Background: Beadica 231 CC and Others v Trustees for the time being of the Oregon Trust and Others

Pursuant to a black empowerment initiative established by Sales Hire CC, the National Empowerment Fund, Beadica 231 CC and the other three appellants, all of which were owned by previously disadvantaged employees of Sales Hire, entered into franchise agreements with Sales Hire CC. The franchise agreements required that the appellants ran their franchised businesses from approved premises, which were leased to the appellants by the Oregon Trust, of which a representative of Sales Hire CC was one of three trustees. Importantly, each of the lease agreements contained an option to renew, which had to be exercised by the appellants at least six months before termination of the lease agreements.

The appellants however, failed to give notice of their intentions to renew their leases within the notice period as stipulated in the lease agreements and the Oregon Trust demanded that the appellants vacate the premises by 1 August 2016.

The appellants instituted an urgent application in the Western Cape High Court for an order that they remain in occupation of the premises, pending a determination of the question whether the options to renew had been validly exercised. The Trustees of Oregon Trust instituted a counter application for the eviction of the lessees on the basis that the leases had expired through the effluxion of time.

The High Court and Supreme Court of Appeal decisions

The four appellants were successful in the High Court, which held, on the basis of Botha v Rich N.O, that the South African law of contract recognises a principle of proportionality, and that it would be a disproportionate sanction for the appellants’ “breach” to hold that the options had not been validly exercised.

The Supreme Court of Appeal overturned the Western Cape High Court judgment and disagreed with the Western Cape High Court’s conclusion that the principle of proportionality forms part of South African law. The four appellants then appealed to the Constitutional Court.

The Constitutional Court decision

The majority judgment, written by Theron J, held that:

  • The Supreme Court of Appeal correctly held in Bredenkamp v Standard Bank of SA Ltd, that a court may not refuse to enforce contractual terms on the basis that the enforcement would, in its subjective view, be unfair, unreasonable or unduly harsh. Rather, fairness and reasonableness are values that:
    • inform the public policy inquiry, in that a contractual term can be invalidated, or its enforcement refused, if such a term or its enforcement would be so unreasonable or unfair, as to be contrary to public policy; and
    • inform the specific doctrines of contract law, and can provide a reason to develop further specific contractual doctrines.
  • The Constitutional Court’s decision in Botha v Rich NO did not introduce a principle of proportionality into the South African law of contract, in terms of which a court can decline to enforce a contractual term, on the basis that enforcement would disproportionately prejudice the interests of one of the contracting parties.
  • the fact that enforcement of a contractual term leads to the demise of a black economic empowerment initiative, is not, on its own, a sufficient reason for a court to decline to enforce a contractual term on the basis of public policy.
  • in order to sustain an argument that enforcement of a contractual term is contrary to public policy, a litigant must adduce evidence demonstrating a good reason for their non-compliance with the contractual terms. The majority held that the appellants had failed to discharge the onus of demonstrating a good reason for their failure to timeously exercise their options to renew the lease agreements.
  • The majority endorsed the overview of the principles governing the public policy inquiry, set out by the Supreme Court of Appeal, in Pridwin Preparatory School and Others v AB and Another (“Pridwin”). These include:
    • public policy demands that contracts freely and consciously entered into 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 that 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 reasonableness to escape the consequences of a contract, because they are not substantive rules that may be used for this purpose.

The majority in the Constitutional Court endorsed this set of principles subject to two qualifications:

  1. the principle that contracts freely entered into should be honoured, expresses an important constitutional value but there is no basis for privileging this value over other constitutional rights and values; and
  2. although judges should exercise restraint when invalidating or refusing to enforce a contractual term on the basis of public policy, “courts should not be so recalcitrant in their application of public policy considerations that they fail to give proper weight to the overarching mandate of the Constitution” and “the notion that there must be substantial and incontestable ‘harm to the public’ before a court may decline to enforce a contract on public policy grounds is alien to our law of contract”.

This judgment answers a number of burning questions that have previously resulted in great uncertainty around South African law of contract, 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.

Aslam Moosajee

Executive | Dispute Resolution

amoosajee@ensafrica.com

+27 82 461 5917

 

Joshua Davis

Candidate Attorney | Dispute Resolution

jdavis@ensafrica.com

+27 72 608 6733