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The fairness in contract dilemma: should a court of law apply its own sense of justice?

by Steven Stuart-Steer on 10 October 2019


The time-honoured position in our common law is that contracting parties will be bound strictly to the terms of their agreement.  Accordingly, where parties have reached consensus and concluded an agreement with lawful terms, they are obliged to honour their agreement.  This principle of certainty in contract is a cornerstone of the South African law of contract and commerce generally.

The strict enforcement of contractual terms is tempered in some instances by legislation.  For example, consumer legislation provides relief to individuals and small-to-medium businesses by providing certain warranties to be implied by law despite anything to the contrary in an agreement.  This intervention was made by the legislature as it sees there to be an inequality in bargaining power in typical consumer contracts and for which it has provided consumers with statutory remedies to ensure products and services comply with minimum standards and will function as can be reasonably expected by a consumer. 

Our courts have recently been faced with a dilemma where they have been called on to enforce an agreement which contains provisions which it considers to operate unfairly on a contracting party to such an extent that it goes against the judge's own sense of justice and for which there is no statutory relief to aid the aggrieved party.  In these cases, litigants have turned to the argument that parties must in an era of constitutional democracy observe a rule of good faith whenever they conclude an agreement.  Failing applying such a standard in their dealings, and if the terms lead to a disproportionate penalty or operate too harshly against a contracting party, they will then call on a court to have such terms struck from an agreement on equitable grounds. 
 
This idea of infusing good faith into the law of contracts has been entertained by our courts with some surprising results at the high court level in the past few years, particularly with regards to lease agreements which this post will briefly highlight a few recent keys cases.  

The Johannesburg High Court used the grounds of fairness in contract to prevent the cancellation of a lease and eviction of the tenant despite failing to pay rental in circumstances beyond the control of lessee

The topic of good faith in contract was recently considered by our courts in Mohamed’s Leisure Holdings (Pty) Ltd v Southern Sun Hotel Interests (Pty) Ltd 2017 (4) SA 243 (GJ).

The hotel operator here (Garden Court Holiday Inn) claimed that certain banking errors beyond its control had interrupted its regular payments resulting in its rental being paid late on two occasions.  

According to the terms of the lease agreement, it was a material term that the rental be paid up timeously or failing which the lessor (Southern Sun Hotels) would be entitled to immediately and without further notice cancel the lease and retake possession of the leased premises. 
 
The lessee was placed on terms for its second default and the lessor proceeded terminate the lease and take steps to evict the hotel operator.  The lessee, however, refused to accept the termination on the basis that a strict operation of the cancellation clause was unreasonable and unfair in the circumstances and should not be lawfully upheld by the court.

The Johannesburg High Court appeared sympathetic to this argument of the lessee and found in its favour despite the lessee being in breach of its agreement.  This decision clearly departed from the expected position, the court finding that the sanction for breach (namely eviction) operated too unfairly and so it would not enforce the agreed terms.  The reasoning given by the court for this decision it was that it was under a duty to develop the common law by infusing principles of ubuntu and fairness into the South African law of contract. 

The case since went on appeal to the Supreme Court of Appeal where it found that allowing good faith to operate as a general remedy to temper the unfair operation of terms in a contract would lead to an unacceptable level of uncertainty in the law of contract. [1]  Accordingly, it overturned the High Court decision and held it remained up to the parties to negotiate a suitable notice period or other remedies at the time of entering into the lease.[2]

The Cape Town High Court to extends the stipulated period of time to exercise a right of renewal of a lease on the grounds of promoting fairness and ubuntu 

The role of good faith in contract was once again considered in the case Beadica 231 CC v Trustees for the time being of the Oregon Trust 2018 (1) SA 549 (WCC) which was initially heard before the Western Cape High Court and subsequently went on appeal to the Supreme Court of Appeal. 

In this case, Sale's Hire CC concluded several franchise agreements with its former employees to become managing owners of its outlets throughout the city of Cape Town for an initial 10-year period as part of a black economic empowerment transaction.  The premises for each outlet were leased by a trust related to the franchisor, for which each lease agreement provided for a 5-year lease term with an option to renew for a further 5 years upon notice in writing at least 6 months prior to expiry of the initial term and provided the parties reach agreement on a new rental for the renewal period.  The rental for the renewal period also provided for a deadlock breaking mechanism to avoid the term suffering from being void for vagueness. 

The franchisees for each of the outlets, however, failed to exercise the option to renew the respective leases in accordance with the terms of the lease agreements having only notified the lessor of their intention to do so approximately 3 months after the stipulated deadline.

The dispute was taken to the Western Cape High Court where it found that Constitutional values require that we consider contracts through a lens of good faith and in this way must "infuse a greater degree of fairness in the law of contract".  

Although it had been conceded by the lessees that if the court were to apply the strict terms of the agreement they would have no case, the High Court still decided in favour of the lessees with a finding that the option to renew had been validly exercised despite not having been done in accordance with notice period as clearly provided in the lease agreements concerned.

When the Supreme Court of Appeal had the opportunity to review the decision, it rather emphasised the need for parties to have certainty in their commercial dealings and that courts may not intervene merely because the terms of an agreement impose a disproportionate sanction for breach of contract or offend a person's sense of propriety or fairness.[3]  The appeal court overturned the decision with a finding that the general rule in South African law of contract remains that an agreement must be honoured unless it is an immoral agreement which violates public policy and confirmed that the power of a court to invalidate a contract on grounds of public policy must be exercised sparingly and only in the clearest of cases.

Conclusion 

There has been a fairly alarming volume of recent case law on the topic of good faith in contract with unpredictable results from our high courts. The Supreme Court of Appeal, however, appears to remain reluctant to provide an elevated role of good faith in the law of contract which does help settle some of the uncertainty which has arisen from such decisions.  

Another recent judgment was delivered by the Supreme Court of Appeal approximately a week ago from the date of writing this post in the Liberty Group v Mall Space Management case on this topic.  The court here again confirmed its position that the concepts of good faith, justice, reasonableness and fairness are not self-standing rules which can justify a party to escape their obligations or avoid the agreed terms under a contract. 

It appears at this time that the Oregon Trust case will be taken on further appeal to the Constitutional Court and so it remains to be seen if this will lead to a different outcome.  The Constitutional Court has previously considered the role of good faith in contract and shown some differing views to those held by the Supreme Court of Appeal.  If the Constitutional Court, as the highest court, does overturn the standing position at common law it could dramatically change the way contracting parties will need to negotiate and draft agreements in the future.  

Based on the standing authority and latest trend of recent cases, however, the position appears to remain that parties must stand by an agreement according to its strict terms and that courts should preserve certainty in commercial dealings.  This ensures contracting parties are able to establish clear rights and predictable outcomes from the conclusion of an agreement. As such, contracting parties should carefully consider their terms and need to draft things clearly, including to properly describe and scope their respective performances and deal with implementations aspects.

One should always consider an agreement carefully and take professional advice as needed.  In particular as shown in recent case law, parties must ensure that at the time of concluding the agreement they have included suitable remedies or procedures to temper any disproportionate sanction for breach.  The interplay between breach clauses, warranties and various boiler plate clauses (such as a force majeure and severability clauses) need to be carefully considered to avoid protracted disputes or unintended outcomes.  If this is not properly dealt with, as things currently stand in the South African law of contract, a court may not be willing or able to step in and re-write the terms of such agreement or otherwise grant equitable relief after the fact.

[1] Mohamed's Leisure Holdings (Pty) Ltd v Southern Sun Hotel Interests (Pty) Ltd (183/17) [2017] ZASCA 176.
[2] The case of Liberty Group Limited and Others v Mall Space Management CC t/a Mall Space Management (644/18) [2019] ZASCA 142 was delivered in the past week as at the date of writing this post.  The argument for equitable relief on the basis of good faith was once again contended here and for which the decision in Mohamed's Leisure Holding case was cited. The SCA, however, dismissed this argument saying such case is not one in which the court is dealing with a term of a contract which is alleged to be contrary to good faith, fairness and equity but simply a rules of the common law of agency (specifically the right of a principal to revoke its mandate).
[3] Oregon Trust v Beadica 231 CC (74/2018) [2019] ZASCA 29.



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