Letters to the editor – August 2019

August 1st, 2019
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Letters are not published under noms de plume. However, letters from practising attorneys who make their identities and addresses known to the editor may be considered for publication anonymously.

Step ahead carefully – the uncertainty of unfair contracts continues

I refer to the article ‘Step ahead carefully – the uncertainty of unfair contracts continues’ 2019 (May) DR 13. This article is not correct. From the heading onwards, it confuses ‘unfair contracts’ and ‘unfair contract terms’ with the power of a court to refuse to enforce a contract.

The question whether to enforce a contract is not reliant on ‘a particular judge’s view’ any more than findings of, for instance, wrongfulness is subjective rather than based on public policy. Nor was the Constitutional Court developing the common law. The common law relating to enforcement of contracts precedes the Constitution (see Sasfin (Pty) Ltd v Beukes [1989] 1 All SA 347 (A)). Since 1994, the Constitution infuses public policy with its values. While Botha and Another v Rich NO and Others 2014 (4) SA 124 (CC) does create difficulties for attorneys advising their clients, it is neither wrong nor destructive to the rule of law as suggested.

In addition, the suggestion that 1981 legislation was ‘enacted to give effect to the Constitution’ is clearly misplaced.

Patrick Bracher, legal practitioner, Johannesburg

Unfair contracts – the uncertainty continues – a reply

I refer to Patrick Bracher’s letter and his comments on the article ‘Step ahead carefully – the uncertainty of unfair contracts continues’ 2019 (May) DR 13.

Unfortunately, Mr Bracher’s questions and reasoning are incorrect for the reasons discussed below.

The area of law known as ‘unfair contracts’ consists of any one of the following scenarios:

  • Unfairness in the making of a contract, which is generally related to the problem of inequality of bargaining power.
  • Unfair contracts and contract terms, which is the scenario Mr Bracher mentions. Even before the demise of the exceptio doli generalis it was settled law that exceptio could not be used to give relief against unfair terms of a contract or the fact that the other party had driven a hard or harsh bargain (see Paddock Motors (Pty) Ltd v Igesund [1976] 3 All SA 332 (A)). This was the common law position.
  • Unfair enforcement of a contract, which was the issue in the Botha and Another v Rich NO and Others 2014 (4) SA 124 (CC). The Botha case was not about ‘unfair contracts terms’, but whether it would be fair to enforce the agreement.

All three of the above are known as ‘unfair contracts’. All three pre-constitutional cases were fought on the grounds of ‘public policy’ as common law did not offer relief. Further this is supported by Brisley v Drotsky 2002 (12) BCLR 1229 (SCA), where Cameron JA held that observations on public policy are as valid in the law of contracts as any other branch of law.

Therefore, it is incorrect to state my article confuses ‘unfair contracts’ and ‘unfair contractual terms’ as ‘unfair contractual terms’ are ‘unfair contracts’ just like ‘unfair enforcement of a contract’ also falls under the category of ‘unfair contracts’. Both are determinable on public policy considerations in determining their enforcement.

Unfair contract terms are absolutely ‘unfair contracts’.

In Sasfin (Pty) Ltd v Beukes 1989 (1) SA 1 (A) Smalberger JA accepted that it served no useful purpose to classify contracts into those contrary to the common law, those against public policy and those contra bonos mores, since the three expressions were interchangeable.

Mr Bracher’s question: ‘[W]hether to enforce a contract is not reliant on “a particular judge’s view” any more than findings of, for instance, wrongfulness is subjective rather than based on public policy’ – is incorrect.

Firstly, the test for ‘wrongfulness’ is not a subjective test but an objective test and is likewise entirely based on public policy (see Steenkamp No v Provincial Tender Board, Eastern Cape 2007 (3) SA 121 (CC) at 139; SM Goldstein & Co (Pty) Ltd v Cathkin Park Hotel (Pty) Ltd and Another 2000 (4) SA 1019 (SCA); and McMurray v HL & H (Pty) Ltd 2000 (4) SA 887 (N) at 905). While Van Deventer J in Graham v Cape Metropolitan Council 1999 (3) SA 356 (C) referred to ‘the sense of justice and legal convictions of the community’. Whereas it should not be based on a particular judge’s legal conviction or view.

Secondly, the notion of ‘wrongfulness’ applies to the law of delict and has nothing to do with the law of contracts. However, I do agree with Mr Bracher’s statement that a ‘particular judge’s view’ is rather subjective in the Constitutional Court (CC), and the Supreme Court of Appeal (SCA) most definitely agrees with me on that point. This goes to the root of the problem with the Botha case because the enforcement of contractual obligations according to the case now relies more on a particular judge’s view of what is fair rather than on the terms of the contract. This was a slap in the face and ultimate insult to the founding principle of our contract law namely ‘the sanctity of contracts’ (and pacta servanda sunt).

Mr Bracher is incorrect in saying that the CC was not developing the common law. In Barkhuizen v Napier 2007 (5) SA 323 (CC) Ngcobo J held what public policy must now be determined by reference to the values that underlie our constitutional democracy as given expression to by the provisions of the Bill of Rights. The judge went on to hold that public policy imported notions of ‘fairness, justice and reasonableness’, and it precluded the enforcement of a contractual term if its enforcement would be ‘unfair or unjust’. This approach was followed by the CC again in Botha even though, the CC decided to formulate a totally new free notion of ‘fairness’ according to what judges now believe is fair, as compared with the Barkhuizen case.

On the contrary, the SCA to this day continues to maintain the following position in determining the common law of contract:

‘[A]lthough abstract values such as good faith, reasonableness and fairness are fundamental to our law of contract, they do not constitute independent substantive rules that courts can employ to intervene in contractual relationships. These abstract values perform creative, informative and controlling functions through established rules of the law of contract. They cannot be acted upon by the courts directly. Acceptance of the notion that judges can refuse to enforce a contractual provision merely because it offends their personal sense of fairness and equity, will give rise to legal and commercial uncertainty. After all, it has been said that fairness and justice, like beauty, often lie in the eye of the beholder’ (my italics) (see SA Forestry Co Ltd v York Timbers Ltd [2004] 4 All SA 168 (SCA)).

Of course, the common law enforcement of contracts precedes the Constitution as pointed out by Mr Bracher in the Sasfin case. But Mr Bracher fails to take note of major differences between traditional common law public policy determination of cases, such as Sasfin and the CC’s public policy determination. In the CC, the test is purely subjective on a particular judge’s point of view, because if we consider the SCA’s judgments – such as, SA Forestry; Potgieter and Another v Potgieter NO and Others 2012 (1) SA 637 (SCA); and Bredenkamp and Others v Standard Bank of SA Ltd [2010] 4 All SA 113 (SCA) – these judgments are in direct conflict with the proposition that unfairness in itself  is a ground for refusing to enforce a contractual provision. Further Nkabinde J in Botha found support for her line of reasoning in the statement that ‘our law of contract, based as it is on the principle of good faith, contains the necessary flexibility to ensure fairness’ and that ‘[c]onsiderations of good faith have shaped the content and development of existing legal concepts of contract in many ways’. However, the judge was subjective with regard to her view of the notion of ‘fairness’, because as discussed above unfairness in itself is not grounds for refusing to enforce a contractual provision. The SA Forestry case tells us that good faith does ‘not constitute independent substantive rules that courts can employ to intervene in contractual relationships. These abstract values perform creative, informative and controlling functions through established rules of the law of contract’. This is further supported by the Brisley case, where the court held that good faith could not be accepted as an independent basis for setting aside or not enforcing contractual provisions. Further, the court in Afrox Healthcare Bpk v Strydom 2002 (6) SA 21 (SCA) held that although the concept of good faith serves as a foundation and justification for legal rules, the court cannot act on the basis of abstract ideas but only on the basis of established legal rules. Therefore, it is established that the notion of ‘fairness’ is based on nothing more than a subjective view of a particular judge sitting in the CC, while the traditional common law test was objective as discussed above, it was also confirmed in the SA Forestry case. There is, likewise, a further major difference, in that the common law public policy is a question of fact and not of law (see Ryland v Edros [1996] 4 All SA 557 (CC), and Amod (born Peer) and Another v Multilateral Motor Vehicle Accidents Fund [1999] 4 All SA 421 (A)). The CC, by introducing free standing requirements of ‘fairness’, turned it into a legal test, as one must now look at reasonableness, good faith and fairness and first try to determine what the law actually is or, ought to be. Thanks to the CC we do not really know what the law itself is anymore and the CC – as I point out below – is now also unsure. The other differences between the common law public policy and CC’s public policy is that, according to Ngcobo J in Barkhuizen, a term of contract, which is unreasonable will be precluded from enforcement. On the contrary, the Sasfin test generally favours utmost freedom of contract and will not allow a party to escape a contract on the grounds of fairness or reasonableness. By ignoring the SCA’s warnings we now have a situation in the CC exactly as having a moving goal post in a soccer match and every time there is a new umpire, they are entitled to change the rules as they see fit.

On this very basis, we now have a new made up law by the CC arising out of the Botha case in that:

The fairness in determining cancellation is self-evidently linked to the consequence of doing so and is no longer dependant solely on breach by the other side and the other sides failure to remedy same and that forfeiture is now reliant on the cancellation of an agreement.

I, therefore, submit that public policy considerations should be determined objectively and subject to a factual test as in the Sasfin case. Further, public policy can also alter in the course of time see Goodman Brothers (Pty) Ltd v Rennies Group Ltd 1997 (4) SA 91 (W). Whereas the common law factual test is more flexible than a legal one.

On this basis I, therefore, welcome the decision of the CC in Cool Ideas 1186 CC v Hubbard and Another 2014 (4) SA 474 (CC), which reads as follows:

‘[T]he law cannot countenance a situation where, on a case-by-case basis, equity and fairness considerations are invoked to circumvent and subvert the plain meaning of a statutory provision which is rationally connected to the legitimate purpose it seeks to achieve, as is the case here. To do so would be to undermine one of the essential fundamentals of the rule of law, namely the principle of legality.’

This is exactly in line with what the SCA was saying all along. I believe the same view must now be applied by the CC to all different scenarios of ‘unfair contracts’.

The above mentioned in itself is not, however, the reason why the Botha case is fundamentally wrong. In Mr Bracher’s letter he states that I argue that the case of Minister of Health and Another NO v New Clicks South Africa (Pty) Ltd and Others (Treatment Action Campaign and Another as Amici Curiae) 2006 (2) SA 311 (CC) in relation to s 27(1) of the Alienation of Land Act 68 of 1981 as well. I blame the CC for bypassing the Alienation of Land Act and that the Alienation of Land Act was enacted to deal with unfair penalties or forfeiture clauses. Mr Bracher has misread my article in its entirety. My argument was that it is the Conventional Penalties Act 15 of 1962 that was bypassed and not the Alienation of Land Act. The Conventional Penalties Act is a piece of legislation that was specifically enacted to address the unfairness of penalties. As stated in the article: ‘The CC in its judgment refers to the seller as making a fundamental error by treating forfeiture and cancellation of the contract independently. Interestingly enough, based on the [Conventional Penalties Act], the seller had the right to enforce the forfeiture by law in the event of a breach, so there was no obligation for the seller to justify the consequences of cancellation, as forfeiture is not reliant on cancellation but on breach of the agreement (see s 1). The CC should have granted the order of cancellation based on breach instead of not agreeing to the cancellation, because it is prejudicial to the money already paid by the purchaser. The law was not followed accordingly, as regard to whether there is cancellation or there is no cancellation of the agreement, under s 1 the seller was still entitled to forfeiture’ (my italics).

The CC also failed to recognise the fact that Botha had a claim for the reduction of the penalties. The correct outcome of the matter should have been as follows:

Justice and rule of law dictates that Rich was legally entitled to cancel the agreement because Botha did not only breach the agreement, she remained in breach of the agreement despite demands made by Rich and even after the contract was cancelled. Despite owing arrears she then demanded transfer in terms of s 27 of the Alienation of Land Act without making reference to how those arrears were to be dealt with. That is why she could not get the transfer.

On cancellation, Botha was then entitled to claim for reduction of the ‘unfair or excessive penalties’ taking into consideration that she had use of the premises since 2003 minus any improvements made to the property. This is justice, this is restitution, this is the law, this is what legislation dictates, this is substantive fairness as it ensures the exercise of contractual autonomy of an adult person, as well as the sanctity of a contract.

The CC violated the principle of legality, s 1 of the Conventional Penalties Act, as well as the separation of powers doctrine as it is not entitled to go against the legislature unless it applies the s 36 limitation clause. Therefore, the Conventional Penalties Act continues to stand and the judgment is incorrect.

Whereas, Mr Bracher’s allegations that my article is incorrect and that the Botha case is neither wrong nor right remain unsupported and are entirely incorrect.

Igor Szopinski, legal practitioner, Johannesburg

 

This article was first published in De Rebus in 2019 (Aug) DR 6.