In the recent judgment of Ndebele and Another v Industrial Development Corporation of South Africa and Others (GJ) (unreported case no 21687/2021, 25-7-2023) (Strydom J), the High Court decided not to slaughter the holy cow (pacta sunt servanda) (see PJ Sutherland ‘Ensuring contractual fairness in consumer contracts after Barkhuizen v Napier 2007 (5) SA 323 (CC) – Part 2’ (2009) Stellenbosch Law Review 50 at 52). The matter arose from a commercial lending transaction between the first respondent, Industrial Development Corporation of South Africa (IDC) and the third respondent Odiweb (Pty) Ltd (Odiweb), where IDC loaned R 57 million to Odiweb. Of interest in this matter is that Emvelo (Pty) Ltd (the second applicant) held 100% of Odiweb’s issued share capital, and Mr Phathisani Ndebele (the first applicant) held 100% of Emvelo’s issued share capital (para 1).
The High Court was tasked with determining the validity and legality of the call option exercised by the IDC, stipulated in the shareholder’s agreement entered into by the IDC, Emvelo, and Odiweb. The call option would be eligible for exercise if Odiweb failed to repay the loan advanced by IDC by the repayment date.
Emvelo exercised its option in March 2015 to buy 49,17% of the IDC’s interest in Odiweb and the loan account against it, which did not materialise. For this reason, the IDC proceeded to exercise its option to buy 50,83% of Emvelo’s shares in Odiweb and elected Ms Buyelwa Patience Sonjica (the second respondent) as the director of Odiweb.
Consequently, an arbitration ensued between Emvelo and the IDC, eventually leading to the IDC abandoning its exercise of the option on 19 September 2018. However, during the arbitration, the IDC exercised a second call option on 6 March 2017, the validity and legality of which was being challenged by the applicants on various grounds. The most pertinent for this article are that the terms of the IDC call option and the IDC call price are contrary to public policy and against ubuntu.
When confronted with contractual disputes, the courts generally respect the doctrine of pacta sunt servanda. However, in certain instances, the courts can refuse to enforce a valid contractual term if the term is against public policy (Beadica 231 CC and Others v Trustees, Oregon Trust and Others 2020 (5) SA 247 (CC)). It has been a longstanding principle in South African law that commercial agreements must further public policy. In Atlas Organic Fertilizers (Pty) Ltd v Pikkewyn Ghwano (Pty) Ltd and Others 1981 (2) SA 173 (T), the court adopted the stance that public policy cannot exist in a vacuum. In determining and applying public policy, the courts must consider the interests of the competing parties, the interests of society, the morals of the marketplace, business ethics, inter alia, that section of the community where the norm is to be applied. Hence, public policy must be flexible enough to be applied to different sections of the community. Of significance is that what one section of the community may find reprehensible may be the applicable norm when determining what is against public policy in that section of the community.
In Barkhuizen v Napier 2007 (5) SA 323 (CC), the court determined that a proper approach to addressing a challenge to contractual terms and their adherence to public policy must consider constitutional values, particularly those entrenched in the Bill of Rights (para 30).
The court’s application of the current legal position and its finding
Strydom J found that for the applicants to be successful, they must show that the founding terms of the call option are contra bonos mores, and they fall far from the grace of commercial ethics and marketplace standards. In showing this, the two-stage test laid down in Barkhuizen, which questions first whether the clause is unreasonable, and secondly if it is reasonable, whether it should be enforced in light of the events, which prevented compliance with the clause, must be applied. Further, the notion of ubuntu, which was described as harnessing ‘the communal nature of society’ by the court in Beadica, must be evident from the terms. In refusing to enforce a contractual term, the decision must not be based on judicial interference; that is, the subjective views of judges on reasonableness and fairness are immaterial. Instead, the decision must be based on whether the provisions/terms are averse to public policy. However, although the enforceability of contractual provisions must now meet the public policy test, pacta sunt servanda is still the cornerstone of our law of contract. Therefore, the terms of an agreement freely and voluntarily entered into by parties must be honoured, unless they are contra bonos mores.
After evaluating the terms of the contractual arrangement, Strydom J found that the ‘structure made good commercial sense’ and, further, the implementation thereof did not give rise to any unfairness. Emvelo must have been aware of the financial delays when it signed the agreement on 22 May 2014, and the second call option (which was only exercised on 6 March 2017) was still an option when the agreement was signed. Further, when the IDC exercised its call option (approximately three years after the agreement was signed), Emvelo still had not attained any financial assistance to enable it to exercise its call option. The court further noted that the applicants were given to acquire alternative finance to supersede the IDC loan but were not able to do so. Since IDC was able to pay for the immovable properties, it was only fair that they buy the shares from Odiweb (para 58). Therefore, based on the applicant’s failure to discharge the onus of proving that the agreement was contra bonos mores and rendered the transaction unfair, the applicant’s defence failed.
In relation to the principle of ubuntu, Strydom J found that the principle was not applicable, as this transaction had nothing to do with the communal nature of society or group solidarity. The court was ‘dealing with an individual businessman who wants to make money for himself or his entity’; thus, ubuntu finds no application (para 61). Therefore, the applicant’s defence on both ubuntu and public policy failed.
Senamile Sishi LLB (UKZN) and Nosiphiwo Nzimande LLB LLM (UKZN) are candidate legal practitioners at Livingston Leandy in Durban.
This article was first published in De Rebus in 2023 (Nov) DR 29.
