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When it comes to the enforcement of contracts and contractual terms deemed “unfair and unreasonable”, South African courts historically could be best described as taking a conservative approach. This has somewhat changed in the democratic era where the necessity of doing simple justice between parties as well as the need to address the inequality of bargaining power between parties are both recognised as in the public interest.[1] The debate of what role – if any – notions such as fairness and equity should play in our legal system, has raged for years.
In recent years the Constitution Court has answered the question and has in the opinion of some, adopted a liberal approach when dealing with unfair and unreasonable contracts and contractual terms. This can be clearly recognised in the case of Barkhuizen v Napier in which the Constitutional Court stated the following:
Notions of fairness, justice, equity and reasonableness cannot be separated from public policy and that public policy is informed by the notion of ubuntu.[2]
Although our courts have recognised that good faith is a fundamental principle in our law of contract, it has yet to precisely spell out how good faith will impact the rules regarding illegality. Practically this makes it very difficult for the ordinary person who feels aggrieved about the terms of a contract that he/she entered into, to ascertain if they would be able to renegotiate or set aside such a contract. Our courts have not been ignorant to the fact that this has created uncertainty and on various occasions they have attempted to provide guidelines for the public to use, such as in the case of African Dawn Property Finance 2 (Pty) Ltd v Dreams Travel and Tours CC in which the Supreme Court of Appeal stated:
Nor does the fact that a term is unfair, or that it may operate harshly, or itself lead to the conclusion that it offends against constitutional principles render it invalid.[3]
Commentators have also suggested that the test to determine if a contract or contractual term is invalid and unenforceable is the following: Has the one party so unreasonably and one-sidedly promoted his or her own interest at the expense of the other party that this infringement of the principle of good faith outweighs the public interest in the enforcement of the contract.[4]
The latest court case regarding this debate and whether a court can refuse to enforce contractual terms on the grounds of public policy is the case of Beadica 231 CC and Others v Trustees for the time being of the Oregon Trust and Others (“Beadica 231”).[5]
In the Beadica 231 matter a dispute arose regarding the renewal of a lease agreement. The Applicants in this matter entered into franchise agreements with an entity known as Sale’s Hire to operate the franchise businesses for a period of ten years. The Applicants operated from a premises that they leased from the first respondent, the Oregon Trust. The Franchisor in terms of the agreement had the option to terminate the franchise agreement if the franchisees were ejected from the premises, or if the lease agreements were terminated.
The lease agreement provided for an initial period of 5 years followed by the option to renew for a further period of 5 years. This option to renew could be exercised by the applicants on written notice to the lessor given 6 months prior to the termination of the lease. The applicants failed to exercise their renewal options within the prescribed time periods and attempted to exercise them at a later stage. The Applicants approached the High Court on an urgent basis stating that the enforcement of the contractual terms would lead to a disproportionate sanction. This was because the Applicants franchise agreement would have been terminated had the leased been cancelled which according to the Applicants would have amounted to a disproportionate sanction and the enforcement was set aside. The case was then appealed to the Supreme Court of Appeal in which the court stated the following:
A court could only decline to enforce contractual terms in cases where it is clear that the enforcement of such terms would offend against public policy. It held that in the current case there were no considerations of public policy which would render the renewal clauses unenforceable.[6]
The appeal was according upheld, and the case made its way to the Constitution Court. The Court held that a court may not refuse enforcement of contractual terms, if in its subjective view, the terms would be unfair, unreasonable or unduly harsh. The court emphasised that these values are not requirements for the validity of contracts but are rather considerations that should be viewed alongside certain principles, such as contractual autonomy and certainty. The court also stated that it is only where the enforcement of contractual terms would be so unfair and unreasonable or so unjust as to be contrary to public policy that a court may refuse to enforce it.
Accordingly, the court has placed a very high bar, so to speak, on people who wish to terminate a contract. The Beadica 231 matter confirmed that principles such as fairness, reasonableness and good faith may play a role when terminating a contract or obligations under a contract but that they are not standalone rules that can be used to erode commercial and legal certainty. As such the public must be certain when entering a contract whether they deem the contract to be fair and reasonable, as contracts freely and consciously entered must and most likely will be honoured.
For any help regarding the interpretation and drafting of contracts and contractual clauses, contact our offices and arrange an appointment.
[1] Sasfin (Pty) Ltd v Beukes (149/87) [1988] ZASCA 94; [1989] 1 All SA 347 (A) (19 September 1988).
[2] Barkhuizen v Napier (CCT72/05) [2007] ZACC 5; 2007 (5) SA 323 (CC); 2007 (7) BCLR 691 (CC) (4 April 2007).
[3] African Dawn Property Finance 2 (Pty) Ltd v Dreams Travel and Tours CC and Others (234 of 2010) [2011] ZASCA 45 (30
March 2011)
[4] D Hutchison ‘Good faith in the South African law of contract’ in R Brownsword, N Hird & G Howells (eds) good faith
in contract: concept and context (1998) 213 at 225-6.
[5] Beadica 231 CC and Others v Trustees for the time being of the Oregon Trust and Others (CCT109/19) [2020] ZACC 13; 2020
(5) SA 247 (CC); 2020 (9) BCLR 1098 (CC) (17 June 2020)
[6] As Above.
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