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Contracts and the Constitution: can courts decline to enforce clear contractual terms in the name of Ubuntu?

by Larissa Holtzhausen & Marko de Wet on 16 November 2018


The common law of contract appears to be under construction, if the string of recently decided cases in our courts is anything to go by. As our judicial system endeavours to reconcile established legal principles with Constitutional imperatives, the status of your agreements may be more than a little uncertain.

The legal principles protecting certainty of contract (namely, pacta sunt servanda, which provided that agreements must be honoured) is well-established and has for many years formed the foundation of the South African common law of contract. This legal principle meant that contractual terms freely and willingly agreed upon will generally be upheld by a court of law even if they operated harshly against a particular party, that is unless those terms could be shown to be against public policy in general.  

A brief overview of some recent key judicial interventions

In recent years, however, our courts have begun to wrestle with how to reconcile this principle with their duty to develop the common law in line with Constitutional imperatives. 

A growing number of cases have centred around discussion of the development of a more robust good faith doctrine in the South African law of contract based on Ubuntu and fairness within the context of the Constitutional dispensation.

The SCA's stance on evicting a commercial lessee on default 

The case of Mohamed's Leisure Holdings (Pty) Ltd v Southern Sun Hotel Interests (Pty) Ltd[1] dealt with a lease agreement for premises from which a hotel business was conducted, containing a material term requiring rental payment to be made before a certain date. The terms of the agreement clearly stated that failure to do so would constitute breach and entitle the lessor to cancel the agreement and evict the lessee. 

When the hotel defaulted on a rental payment due to a purported banking error (which occurred again after rectifying a prior default a few months earlier after a warning notice had been issued) , he bank immediately gave notice of cancellation and required that such lessee vacate the premises. 

The SCA upheld an eviction order being granted, finding that enforcement of a valid contractual term need not necessarily be ‘fair’ and ‘reasonable’ in every instance where no public policy considerations are implicated. Unless it can be shown that the contract was not freely entered into, contractual terms should be upheld. 

The SCA's interpretation of a vague clause to negotiate in good faith in terms of renewal of a lease

The role of Ubuntu in the interpretation of contracts was again scrutinised by the SCA in Roazar CC v The Falls Supermarket CC[2].   The issue before the court in this instance was whether parties to a contact could be legally obliged to negotiate in good faith.

The contract between the parties provided that the renewal period for a lease must be negotiated, and that parties must endeavour to reach agreement, but was silent on the form said negotiations should take, and the extent and duration thereof.  

The SCA held that enforcing a duty to negotiate in good faith would bring uncertainty to a contract and make it void for vagueness, unless the contract provided a clear mechanism for breaking a deadlock during negotiations.  
 
Ultimately, the court found an ‘agreement to agree’ to be unenforceable, holding that it could not impose a duty to negotiate in good faith in circumstances where there was no way of determining what the period of the negotiations should be, or what would be considered ‘fair’, or what criterion should be used to measure whether parties were indeed negotiating in bad faith as alleged. 

The Western Cape High Court's approach to a time out on the renewal of a lease 

In the judgement of Beadica 231 CC and others v Trustees, Oregon Unit Trust and Others [3], the Western Cape High Court took a drastically different view. This case dealt with interconnected franchise and lease agreements, which lease agreements contained clauses giving the lessees an option for renew. The contract provided that rental for any further term was to be agreed between the parties in writing at the time of renewal, failing which the agreement provided for dispute resolution. 

The applicants renewed their leases out of time and sought an order declaring their late action a valid exercise of their options to renew.  The court held that a greater degree of fairness was needed in developing the law of contract, based on the values of Ubuntu, and opined that honouring a contract “cannot be a matter of each side pursuing his or her own self-interest without regard to the other party’s interest.”

The court stated that cancellation would be a disproportionate sanction, and that if the lease agreements were cancelled, the franchise agreements would not have effect and the applicants’ businesses would fail.  Considering these facts, the court held that late renewal of the lease agreements should not pose a barrier to the franchises lasting the complete period. 

The court ultimately concluded that “if honouring a contract was not merely a matter of each side pursuing his or her own self-interest with regard to the other party’s interest and that is not the exclusive lens through which our contract law should be evaluated, then, in order to promote a more nuanced focus, it must follow that the relief sought should be granted”.

In closing remarks, the court did address the contention that such a conclusion would undermine legal certainty and commented that the Constitution demands an audit of all law and that such demand cannot be defended by the idea that legal certainty will be compromised.

Where does this leave certainty in contact? 

It remains to be seen how the SCA (or even the Constitutional Court) may respond and continue to develop our law to align with Constitutional values.  It seems that the need for clear, unambiguous drafting of agreements is becoming ever more significant. Vague or open-ended clauses should be avoided at all costs, particularly clauses which leave details to be negotiated at a later stage. If such clauses are included, it is essential they be accompanied by distinctly defined deadlock-breaking mechanisms.

Furthermore, it appears that South African courts are becoming  less willing to enforce clauses or agreements which may be perceived to operate too harshly or unfairly against one party or which appear to have been drafted with pure self-interest in mind, even in circumstances where no public policy considerations are implicated. 

In light of the above, during the negotiation and drafting stages of an agreement, it would serve parties to view each clause and its potential effects through the lenses of fairness, Ubuntu and the values enshrined in our Constitution. If an agreement does not meet Constitutional muster, courts may not be prepared to enforce or accept it when the time comes.

Finally, when exercising rights under an agreement, parties would be well advised to act in an equitable manner, taking into consideration the probable ramifications that the exercise of rights or remedies will have for the other party. If the decisions outlined above are any indication, even the exercise of a clear unambiguous right under an agreement may be voided by a court if the consequences of that exercise are seen to be unjust.

[1] Mohamed's Leisure Holdings (Pty) Ltd v Southern Sun Hotel Interests (Pty) Ltd (183/17) [2017] ZASCA 176; 2018 (2) SA 314 (SCA).
[2] Roazar CC v Falls Supermarket CC (232/2017) [2017] ZASCA 166; [2018] 1 All SA 438 (SCA); 2018 (3) SA 76 (SCA) (29 November 2017).
[3] Beadica 231 CC and others v Trustees, Oregon Unit Trust and Others 2018 (1) SA 549 (WCC).



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