It is important to be aware of recent case law developments when drafting agreements and providing advice to clients on the interpretation of certain clauses in their agreements as certain clauses are receiving increasing scrutiny especially where a party is in a weak negotiating position or is an unsophisticated business person.

When drafting a document, one needs to consider if a certain clause may need to be softened or reworded and one will need to explain to a client that he or she cannot simply assume that a clause, no matter how onerous the clause is, will be fully enforceable regardless the circumstances.

An important case to take note of in this regard is the recent case of Beadica 231 CC and Others v Trustees for the time being of the Oregon Trust (IT 728/1995) and Others (13689/2016) [2017] ZAWCHC 134; 2018 (1) SA 549 (WCC) (16 November 2017), which goes to the heart of what now constitutes the law of contract in constitutional South Africa.

In this case the court was faced with a situation whereby it had to decide whether to enforce the strict terms of a lease agreement and to follow the rule of law or whether this approach was insufficient, in this instance, to justify the relief sought.

The applicants are franchisees in terms of a 10 year franchise agreement entered into with the second respondent. Their business mostly involves the rental and sale of builder’s equipment and they are all black owned enterprises that were acquired as part of a black economic empowerment transaction funded by the third respondent. After entering into the franchise agreement, the applicants entered into a lease agreement (which ran parallel to the franchise agreement and contemplated that the franchise would operate from the leased premises only) with the first respondent for an initial period of 5 years with a right to renew for a further 5 years, provided the applicants gave notice of its exercise of the option at least 6 months before the initial termination date.

A complication arose with the applicants failing to renew the lease by the required date and the first respondent then wanting to evict the applicants from the leased premises. It the applicants were to be evicted they would face the very real possibility of their business having to close its doors and/or their franchise agreement being terminated.

The applicants approached the court for an order declaring previous correspondence exchanged between them (requesting a renewal of the lease dating back to 3 months before the termination date as opposed to 6 months as required) and the first respondent as proof that they had in fact exercised their renewal option. The applicants advised that they were not “sophisticated business men” and that they were not aware of all the obligations placed on them in terms of the lease such as the date by when they had to exercise their right to renew the lease.

The applicants advised the court that if the strict terms of the lease agreement were applied, the result would be their eviction, the end of their business and the termination of their franchise agreement – all of which would be contrary to public policy. The approach of the first respondent would also seemingly be inconsistent with the first and second respondents BEE objectives and those of the franchise transaction, which was to promote certain transformation objectives. Other than failing to exercise the renewal notice in time the applicants had complied with the lease terms and obligations and paid off their required loans to the third respondent. The third respondent contented that if the applicant’s business was to close the entire purpose of the BEE transaction and paying off their loans to allow them to “enjoy full economic benefit of their businesses unencumbered by these loan obligations” would be defeated.

Counsel for the applicant accordingly followed the approach that the law of contract in South Africa was not “infused with constitutional values, which, for the determination of the case, not only were predicated on the strict terms of the lease agreement but which had to be examined within  the broader context of the purpose behind both agreements read together with the doctrine of good faith and fairness” and in his argument he referenced case law stating that it was “necessary to infuse the law of contract with constitutional values, including values of ubuntu, which inspire much of our constitutional compact”.

Counsel for the applicant further referenced case law stating that “on a number of occasions in the past the court has had regard to the meaning and content of the concept of ubuntu which emphasises the communal nature of society and social justice and fairness and envelopes the key values of group solidarity, compassion, respect and human dignity. Were a court to apply the aforementioned argument, the underlying notion of good faith in contract law, the maxim of contractual doctrine that agreements seriously entered into should be enforced, and the value of ubuntu, which inspires much of our constitution compact, may tilt the argument in its favour. Contacting parties need to relate to each other in good faith and where there is a contractual obligation to negotiate, it would be hardly imaginable that our constitutional values would not require that the negotiation must be done reasonably, with a view to reaching an agreement and in good faith”.

In this particular case the court found the sanction of eviction disproportionate because both the lease agreement and franchise agreement signed maximised the interest of both the parties and it was clear that the franchise agreement and the lease agreement were inextricably intertwined in that when the franchise agreement and lease agreement were concluded, the franchise agreement would enure for 10 years, the business would be located in the leased premises and that after 5 years the applicants would have a right to renew their lease.

What is important to note here is that the above decision does not mean that a court will in every instance dispense with the strict interpretation of contract law as this will deter parties from turning to the court to resolve disputes.

Conclusion: As mentioned above, it is very important to be aware of recent case law and how certain clauses in certain instances may be viewed by a court of law. A client will not be very impressed if their attorney fails to advise them or warn them up-front about the possibility of a different interpretation being taken on a clause they have specifically requested to be inserted into an agreement.

 

Dingley Marshall Inc

June 2018

This article should not be used or relied upon as professional advice and is for information and marketing purposes. Please consult with one of our attorneys should you need legal assistance relating to this area of law.