Can you use good faith to alter contractual rights and obligations?

November 1st, 2021
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Capitec Bank Holdings Limited and Another v Coral Lagoon Investments 194 (Pty) Ltd and Others [2021] 3 All SA 647 (SCA)  

Good faith remains a fundamental principle in many countries, including in South African contract law, but you still cannot invoke it to squeeze consent out of your counterpart. Many negotiating parties will insist on having a good faith obligation, but what real value does this give to parties involved and what impact does good faith have on the terms of a contract? South African courts (among other jurisdictions) have wrestled with this topic on various occasions and in different factual complexities. In particular, the question of when the principles of reasonableness and fairness can be invoked to release a contracting party from the consequences of an agreement duly entered continues to be the centre of judicial discourse. The Capitec case reaffirmed some of the key principles to the application of the good faith principle on the contractual obligations of the parties.

Background facts

The facts of the case are that Capitec Bank Holdings Limited (Capitec Holdings), Coral Lagoon Investments 194 (Pty) Ltd (Coral), and Ash Brook Investments 16 (Pty) Ltd (Ash Brook), concluded a subscription of shares and shareholders agreement (the subscription agreement). In terms of the subscription agreement, Coral, wholly owned by Ash Brook, would subscribe for shares in Capitec Holdings (BEE shares) for Capitec Holdings to increase its black shareholding, and thereby fulfil its black economic empowerment obligations. Coral later sought to sell the BEE shares as fulfilment to a settlement agreement obligation. Coral requested Capitec Holdings’ consent to the sale of the shares on the grounds of a clause in the subscription agreement, which limited the rights of Coral to sell its shares. Capitec Holdings refused to grant Coral the consent. Coral and Ash Brook brought an urgent application to the High Court for a declarator that the withholding by Capitec Holdings of its consent for the disposal of the sale shares, was among other things, and for the purposes of this discussion, in breach of Capitec Holdings’ duties of good faith.

Key principles of judgment

The Supreme Court of Appeal (SCA) looked at the jurisprudence on the issue of good faith and succinctly set out some of the key principles that were recently affirmed by the Constitutional Court in Beadica 231 CC and Others v Trustees, Oregon Trust and Others 2020 (5) SA 247 (CC). The four principles are –

  • freedom of contract or pacta sunt servanda remains central to the law of contract;
  • our common law now read with the Constitution determines how the freedom of contract should be exercised;
  • the scope of public policy and its application, to invalidate contract terms, should be undertaken with circumspection and only in clear cases; and
  • good faith and fairness are not substantive, free-standing principles to which direct recourse may be had to decline the enforcement of a contractual term.

The SCA also cautioned against the inclination to distinguish between good faith in terms of contract law and in terms of common law and stated that our contract law is part of our common law. No more weight is, therefore, given to a good faith provision over the doctrine of good faith, which is already enshrined in our law of contract.

Although the court had already found that the provision in dispute did not require Capitec Holdings’ consent and that the High Court had erred in its finding, Unterhalter AJA highlighted a significant point, that even if Capitec Holdings consent was required according to the High Court’s finding, Capitec’s ethical or moral duties according to the High Court’s view did not impute a duty on Capitec Holdings to give consent to the sale. Capitec Holdings would have still enjoyed the right to either grant the consent or refuse to grant it.

Conclusion

The key lessons from this decision are that:

  • The inclusion of the good faith duty does not add any weight to the other terms of the contract as this is a doctrine already fundamental to our contract law.
  • Consents and approvals conferred to a party, particularly, which is left to the discretion of that party, remain their right to exercise. That party’s election to refuse consent does not automatically offend fundamental public values.

With this case, we are once again reminded that invocations of good faith cannot be used to alter the contractual rights and duties of parties. Parties must clearly consider terms such as ‘reasonably’, ‘discretion’, ‘undue’ etcetera, to ensure that an agreement is substantially clear of the pitfalls that come with the interpretation of contracts and the doctrine of good faith.

Thubelihle Shange LLB (UP) is a legal practitioner at ENSafrica in Johannesburg.  

This article was first published in De Rebus in 2021 (Nov) DR 39.

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