Self-autonomy, or the ability to regulate one’s own affairs, even to one’s own detriment, is the very essence of freedom and a vital part of dignity. The extent to which the contract was freely and voluntarily concluded is clearly a vital factor as it will determine the weight that should be afforded to the values of freedom and dignity. The other consideration is that all persons have a right to seek judicial redress

Per Ncgobo J, Constitutional Court, in Barkhuizen v Napier 2007 (5) SA 323 (CC)

 

On 16 November 2017 the Western Cape High Court delivered a somewhat controversial judgment in Beadica 231 CC and Others v Trustees for the time being of the Oregon Trust (IT 728/1995) and Others 2018 (1) SA 549 (WCC). In his judgment, Davis J eroded the contractual principle of freedom to contract, known as the pactum sunt servanda, in finding that South African contracts were ‘infused’ with the values of fairness and reading the principles of Ubuntu into such contracts.

 

Principles of fairness and Ubuntu

Before the High Court was a contractual arrangement whereby the applicants, lessees to separate lease agreements with the Oregon Trust, had failed to exercise their options to renew their lease agreements timeously. Consequently, the Oregon Trust (as lessor) considered that the agreements to have terminated and notified the lessees to vacate the premises. The lessees applied to High Court that they be permitted to remain in occupation of the leased premises pending a decision by the Court whether the options to renew were validly exercised (albeit belatedly).

The lessees’ main argument in the High Court was that the lease agreements had originated from a related franchise arrangement, set up as part of a black empowerment initiative by the National Empowerment Fund, where the businesses were to be run from the premises let by the lessor.

Consequently, as the lessees argued, the court should permit them to remain in occupation of the leased premises and prohibit the lessor from taking steps to evict them, despite not exercising their respective options to renew the agreements in a timely manner. Essentially, the lessees asked the court to rule against the lessor’s express contractual right to regard the agreements as having terminated based on the principles of fairness and Ubuntu.

This judgment had serious ramifications in the commercial environment and eroded the rights of parties to contract freely and voluntarily with one another. It also afforded our courts too much power in their ability to make and interpret contracts entered into by private parties.

 

High Court Decision overturned

On 28 March 2019, the Supreme Court of Appeal overturned Davis J’s decision in the judgment of Trustees for the time being of Oregon Trust v BEADICA 231 CC and Others 2019 (4) SA 517 (SCA) (“Oregan”).

It is generally agreed that, in a constitutional democracy, our courts should retain the power to declare void and, where necessary, refuse to recognise the validity of contracts which are contrary to public policy. However, as the saying goes, ‘with every power comes great responsibility’, and thus this judicial power should not be too hastily exercised. This understanding has been deep-rooted into our case law.

In Oregan, Lewis ADJ performed an in-depth examination in his judgement, reflecting on the development of the relationship between the principles underpinning the freedom to contract and our Constitutional values; legal practitioners and academics would benefit from reading this judgment.

Quoting A B v Pridwin Preparatory School [2018] ZASCA 150; [2019] (1) SA 327 (SCA), Lewis ADJ sets out the principles governing private contracts and public policy as follows:

“‘The relationship between private contracts and their control by the courts through the instrument of public policy, underpinned by the Constitution, is now clearly established. It is unnecessary to rehash all the learning from our courts on this topic. It suffices to set out the most important principles to be gleaned from them:

  • Public policy demands that contracts freely and consciously entered into must be honoured;
  • A court will declare invalid a contract that is prima facie inimical to a constitutional value or principle, or otherwise contrary to public policy;
  • Where a contract is not prima facie contrary to public policy, but its enforcement in particular circumstances is, a court will not enforce it;
  • The party who attacks the contract or its enforcement bears the onus to establish the facts;
  • A court will use the power to invalidate a contract or not to enforce it, sparingly, and only in the clearest of cases in which harm to the public is substantially incontestable and does not depend on the idiosyncratic inferences of a few judicial minds;
  • A court will decline to use this power where a party relies directly on abstract values of fairness and reasonableness to escape the consequences of a contract because they are not substantive rules that may be used for this purpose.’

Finding in favour of the lessors, the SCA disagreed with Davis J’s view that the ‘sanction’ of termination and eviction was disproportionate to the failure of the lessees to comply with terms of a contract, by not giving timeous notice of renewal. As Lewis ADJ states, this notion, that a sanction for breach of or failure to comply with the terms of a contract which is agreed between the parties, can be disproportionate and therefore unenforceable is “entirely alien to South African contract law”.

It is important to note that the SCA did not deny the importance of reading our Constitutional principles and public policy into private contracts. However, the SCA rightly emphasised that this power should be used sparingly.

In the SCA case, it was said that our courts should assess whether enforcement of the contract, or specific clauses, in the circumstances are unconscionable. The onus would be placed on the party attacking such clause or contract to establish facts which warrant a court to step in and enforce a new contract between the parties.

 

Conclusion

It is submitted that the Oregon decision places the law of contract back on track and contracting parties are, once again, restored the freedom to contract on their own terms, within the bounds of our Constitution.

Interestingly, the SCA decision has been taken on appeal to the Constitutional Court.  The matter was heard on 5 November 2019 and we are currently awaiting judgment and will update you should the legal position change.