Judicial control of enforcement of contractual terms

August 1st, 2020

Beadica 231 CC and Others v Trustees for the time being of the Oregon Trust and Others (CC) (unreported case no CCT109/19, 17-6-2020) (Theron J (Khampepe ADCJ, Jafta J, Majiedt J, Mathopo AJ, Mhlantla J and Tshiqi J concurring))

In the Beadica decision, the Constitutional Court (CC) had an opportunity to clarify its approach on the judicial enforcement of contractual terms since the decision in Barkhuizen v Napier 2007 (5) SA 323 (CC). This case note scrutinises the CC decision of Beadica and briefly examines the extent to which a court can interfere with a parties’ contractual terms.

In Beadica, four applicants entered into franchise agreements with the respondent to operate a franchise business for a period of ten years. The franchise agreements required that the franchisees operate their franchised businesses from an approved location leased by the Trust. In addition, the franchise agreement gave the respondent an option to terminate the agreement in the event that the applicants were ejected from the approved location. The applicants concluded five-year lease agreements with the Trust and the renewal clause thereof required that the lessees give six months written notice of intention to renew prior to termination. The applicants failed to give written notice of their intention to renew within the period of six months as required. Pursuant to this failure, the Trust demanded that the applicants vacate the leased premises. The applicants challenged the renewal clause contending that the strict enforcement thereof would be contrary to public policy.

With reference to the Barkhuizen case, Theron J held at para 37 that the case involved a two-stage inquiry. ‘The first stage involves a consideration of the clause itself. The question is whether the clause is so unreasonable, on its face, as to be contrary to public policy. If the answer is in the affirmative, the court will strike down the clause. If, on the other hand, the clause is found to be reasonable, then the second stage of the inquiry will be embarked upon. The second stage involves an inquiry whether, in all the circumstances of the particular case, it would be contrary to public policy to enforce the clause. The onus is on the party seeking to avoid the enforcement of the clause to “demonstrate why its enforcement would be unfair and unreasonable in the given circumstances.” … [T]hat particular regard must be had to the reason for non-compliance with the clause’.

However, before embarking on an investigation into these inquiries, the court took time to clarify the divergence of approaches between SCA decisions and the CC in regard to the judicial control of contracts. The ‘divergence’ is said to centre on the role of the abstract values of fairness and reasonableness in South African law of contract and whether the values could be directly relied on to invalidate, or refuse to enforce, contractual terms. In this regard, Theron J held that there was an agreement between the CC and the SCA that abstract values do not provide a free standing basis on which a court may interfere in contractual relationships and that their application is governed by the rules of contract law, including the rule that a court may not enforce contractual terms where the term or its enforcement would be contrary to public policy.

To dispose of the matter, the court first considered the question as to whether the applicants discharged the onus of demonstrating that the enforcement of the renewal clauses would be against public policy in the particular circumstances of the case at hand. In addition, Theron J at para 91 held that a party who ‘seeks to avoid the enforcement of a contractual term is required to demonstrate good reason for failing to comply with the term’. The applicants’ contention was that the enforcement of the renewal clause would lead to the failure of the black economic empowerment initiative. Theron J found that there were no circumstances that prevented the applicants from complying with the terms of renewal clauses in the leases and that the only inference to be drawn was that the applicants simply neglected to comply with the clause. Accordingly, it was held that the applicants had failed to discharge the onus resting on them to demonstrate that in the circumstance of the case, the enforcement of the clause would be contrary to public policy and thus on that ground alone had to be dismissed. In addition, Theron J acknowledged the outcome on black economic empowerment initiative, but held at para 96 that ‘[t]his harsh outcome alone, absent an explanation for their failure to comply with the terms of the renewal clauses, cannot constitute a sufficient basis to hold that the enforcement of the clauses would be contrary to public policy’.

Judicial control of contractual terms

The CC was presented with an opportunity to develop the doctrine of judicial control of enforcement of contractual terms and clarify its proper approach since the decision of Barkhuizen. In South African law, judicial control of enforcement of contractual terms has been exercised primarily through the prism of public policy. The important principle in this regard is that public policy demand that contracts freely and consciously entered must be honoured. This in essence is the principle of pacta servanda sunt, which the court held at para 92 gives ‘effect to the central constitutional values of freedom and dignity’. However, it is recognised that in our new constitutional dispensation, pacta servanda sunt is not the only, nor the most important principle relating the judicial control of the contracts, as the requirement of public policy is governed by a wide range of constitutional values. Thus, there is no basis for privileging pacta servanda sunt over other constitutional values and rights. This is so because the determination of public policy is now rooted in the Constitution. As result, where a number of constitutional rights and values are implicated, a carefully balancing exercise is required to determine whether enforcement of the contractual terms would be contrary to public policy in the circumstances (see para 87).

In conclusion, parties to a contract have autonomy or freedom to determine the terms they wish to include in their contract. However, where parties exercise their freedom of contract to incorporate or enforce a term, which is contrary to public policy, the court will invalidate it.

Emmanuel Tshikhudo LLB (UniVen) is a candidate legal practitioner at Moche Attorneys in Pretoria.

This article was first published in De Rebus in 2020 (Aug) DR 34.

De Rebus