There has been a high volume of recent case law on the topic of good faith in contract, in which we have seen varying results from different courts.  At last, we have received a clear and authoritative judgment, the Constitutional Court having now finally resolved the ongoing debate and uncertainty on this topic.

This uncertainty played out in the most recent case of Beadica 231 CC and Others v Trustees for the time being of the Oregon Trust and Others (CCT109/19) [2020] ZACC 13 (17 June 2020), which worked its way through the courts on appeal.  

The National Empowerment Fund ("NEF") entered into a broad-based black economic empowerment initiative with Sale's Hire CC in terms of which the latter's senior staff were provided with funding to establish franchise businesses throughout the Western Cape.  It was a key term of the franchise agreements that the new businesses would need to be run at designated premises affiliated with the owner of Sale's Hire CC.  

The franchise agreements provided for an initial term of 10 years.  The required premises were, however, leased to each of the staff for a term of 5 years, with an option to renew for a further 5 years by giving at least 6 months prior notice before the end of the initial lease term.  The new franchisees failed to exercise their rights of renewal on time (or in some cases at all).  Once the leases had run their course, the lessor provided notice to vacate the premises, which in turn was fatal to the franchise businesses.  

The franchisees fought the eviction, claiming among other things that the removal from the premises was unfair and unduly harsh.  The former employees were successful in the Western Cape High Court, which granted an order to stay the eviction on a principle of fairness, finding eviction was a disproportionate sanction as it would lead to the collapse of their newly founded businesses.  However, this decision was overturned by the Supreme Court of Appeal, finding there to be no legal basis for denying the eviction on grounds of fairness alone and that they must abide by the strict terms of their agreement.  

Our courts have for many years now been struggling with an idea of whether or not they potentially also possess a broader equitable power to strike down, or refuse to enforce, individual contracts (or specific terms therein) on grounds that the agreement is unfair.

The Constitutional Court carefully considered the role of good faith, fairness and Ubuntu in this context, but confirmed the decision of the Supreme Court of Appeal that fairness, reasonableness and proportionality are not free-standing principles to invalidate a contract or deny enforcement of its terms.  

The court goes on to formulate a proper constitutional approach to good faith and fairness, indicating proper regard must be had to constitutional values when applying public policy considerations.  Such approach informs and expands on the already well-established position at common law.  The common law requirement that contracts must conform to public policy norms will accordingly become indirectly developed by the Constitution and constitutional values, not by a separate self-standing "fairness" remedy.  

A balancing act must be applied.  Fairness, reasonableness and Ubuntu may at times outweigh the value of freedom to contract, but a court must only exercise powers to strike down or refuse to enforce contractual terms in the worthiest of cases.  The party who alleges a contract to be contrary to public policy bears the burden of proof of establishing such fact and to show how a public policy consideration will outweigh the need for commercial certainty in contracts as protected by the principle of freedom of contract. 

The Constitutional Court ultimately ruled against the former employees.  No suitable explanation was found to have been offered for the failure to exercise the renewal rights within the required timeframes.  Notably, arguments that the empowered franchisees were relatively inexperienced business people who could not be expected to navigate complex commercial deals were not sufficient to convince the court that the terms were contrary to public policy.  It seemed to find such an argument self-defeating to the purpose of the NEF.  

The Constitutional Court has provided much needed guidance on the roles of fairness, good faith and Ubuntu in the South African law of contract and reconciled much of the uncertainty which has flooded our courts over the past years.  Courts still carry an inherent power to strike down an agreement which is illegal or can be seen to be harmful to society in general.  However, our courts will not exercise this power merely because a particular contract is unfair or a "bad deal".  A party would need to show a proper cause for such extraordinary relief.

In essence, the principle of sanctity of contract prevails as the much-needed bedrock of commercial activity.  Contracts afford parties an opportunity to properly govern their relationship with the aim to create binding obligations and predictable outcomes.  

The general rule is that agreements must be honoured regardless of unfavourable terms.  Contracting parties must ensure they carefully consider their agreements and negotiate any needed changes prior to conclusion and so should take professional advice when needed.  

Notably, ensuring implementation issues are properly scripted and that enforcement remedies will provide the required relief is essential.  If not properly closed off before conclusion of the agreement, it seems a court may not be able to come to an aggrieved party's aid later on without a clear right to do so.