Step ahead carefully – the uncertainty of unfair contracts continues

May 1st, 2019
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Picture source: Gallo Images/Getty

In the case of Botha and Another v Rich NO and Others 2014 (4) SA 124 (CC) the Constitutional Court (CC) held that the exercise of a right of cancellation in a contract of purchase in instalments of immovable property was unenforceable on the ground that to enforce it would be ‘unfair’ in the circumstances because of its disproportionately adverse consequences for the purchaser.

Facts

GB Bradfield (ed) in Christie’s Law of Contract in South Africa 7ed (Cape Town: Juta 2016) at p 22 summarises the case as follows: The purchaser ‘after having paid more than half the instalments due under the contract, but before exercising the statutory right in terms of [s 27 of] the Alienation of Land Act [68 of 1981] to have the property transferred into her name against registration of a mortgage bond over the property for the balance of the purchase price, the [purchaser] defaulted in the payment of instalments, municipal rates, taxes and service charges for which she was liable under the agreement. The seller exercised its contractual right to cancel the contract. The contract contained a forfeiture clause in terms of which the instalments already paid were forfeited to the seller. The purchaser, despite having made no further payments, then invoked her statutory right to claim transfer of the property into her name, against registration of a mortgage bond over the property for the balance of the purchase price. No reference was made to how the arrears were to be dealt with. The seller responded some time after the demand for transfer with a demand for payment of the arrears still due. The purchaser did not respond to this and the seller notified her of its intention to cancel the contract. The purchaser responded tendering the arrears against transfer of the property. The seller did not respond to this and instituted proceedings to have the sale cancelled and the purchaser evicted. The application was opposed by the purchaser who counterclaimed for an order compelling transfer of the property into her name. The seller argued that the contract had been validly cancelled and, alternatively, that, in the event that the cancellation clause was found to be unenforceable, they were entitled to withhold transfer of the property until the purchaser had paid the arrears due.’

Judgment

In reaching its decision that the enforcement of the contracting right to cancellation would be ‘unfair’ in the circumstances, the court relied on a somewhat ‘free-floating’ notion of fairness (see D Bhana and A Meerkotter ‘The Impact of the Constitution on the Common Law of Contract: Botha v Rich NO (CC)’ (2015) 1323 SALJ 494).

The court held: ‘In my view, to deprive Ms Botha of the opportunity to have the property transferred to her under s 27(1) and in the process cure her breach in regard to the arrears, would be a disproportionate sanction in relation to the considerable proportion of the purchase price she has already paid, and would thus be unfair. The other side of the coin is, however, that it would be equally disproportionate to allow registration of transfer, without making that registration conditional upon payment of the arrears and the outstanding amounts levied in municipal rates, taxes and service fees.’

Regarding the cancellation of the agreement the court held as follows:

‘[G]ranting cancellation – and, therefore, in this case forfeiture – in circumstances where three-quarters of the purchase price has already been paid would be disproportionate penalty for the breach. In their application for cancellation the trustees did not properly address the disproportionate burden their claim for relief would have on Ms Botha. They took the view that the question of forfeiture and restitution was independent of, and logically anterior [sic] to, the question of cancellation. That was a fundamental error. The fairness of awarding cancellation is self-evidently linked to the consequences of doing so. The trustees’ stance, therefore, meant that they could not justify this court’s awarding the relief they sought. In view of the above the cancellation application must fail.’

Issue

Bradfield (op cit) at p 23, thereafter correctly points out that: ‘This decision creates uncertainty with regard to the exercise of a contractual right to right to cancellation … on the basis that the effect of cancellation will be disproportionately harsh in light of their breach.’

However, the inquiry into this matter cannot end here. It is necessary to examine whether the CC’s judgment is correct in the first place and whether the underlying reasoning of the court is acceptable to justify the outcome.

Prior to 1962 as it is now, it is not uncommon for contracting parties to include a term in their contract binding the one party to pay a fixed sum of money or return the property and forfeit all instalments already paid in the event of committing a specified breach of the contract. Parliament in order to combat improper ‘unfair’ or ‘excessive’ penalties or forfeiture clauses intervened and as a result the Conventional Penalties Act 15 of 1962 (the Act) was passed.

Snyman J in Van Staden v Central South African Lands and Mines [1969] 1 All SA 44 (W) at 351 summarised the object of the Act as follows:

‘This Act may be said mainly to aim at two things –

(1) to make it plain beyond doubt that a penalty stipulation arising out of the contractual obligation is enforceable at law; and

(2) to prevent the exaction of unfair or excessive penalties being stipulated for in contracts, and in this respect also to prevent both a penalty and damages being claimed in respect of the same act or omission on the part of the debtor.’

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 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.

Now we come to the most important section in this article. I urge legal practitioners to consider the following:

The starting point for any case – where there is legislation involved – is 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) at para 437 where Ngcobo J explained that it is impermissible to rely directly on constitutional provisions when particular legislation has been enacted to give effect to the Constitution, as this would amount to bypassing the relevant legislation. In the Botha case this is exactly what happened. The CC relied directly on the Constitution applying a method of what the judges themselves think is fair thereby bypassing legislation enacted particularly to deal with unfair penalties or forfeiture clauses. The court was required to follow the Act.

In Potgieter and Another v Potgieter NO and Others 2012 (1) SA 637 (SCA) the Supreme Court of Appeal (SCA) in response to a decision of the CC in Barkhuizen v Napier 2007 (5) SA 323 (CC) – which decision was based on the CC’s notion of what is unreasonable and unfair in the area of contract law – stated that this notion is fundamentally unsound and it did not reflect the principles of our law of contract. The court further held: ‘Reasonableness and fairness are not freestanding requirements for the exercise of a contractual right’. Brand JA held that unless and until the CC holds otherwise, the law must be taken to be as stated by the SCA, and the judge concluded that the High Court had been obliged to follow the common law, and that its decision to do otherwise had violated the principle of legality. Brand JA further added that the reason why the law should not give judges the freedom to decide cases according to what they regard as reasonable and fair is essentially that this would give rise to intolerable legal uncertainty.

In Burger v Central South African Railways 1903 TS 571 at 576, Innes CJ said that ‘our law does not recognise the right of a court to release a contracting party from the consequences of an agreement duly entered into by him merely because that agreement appears to be unreasonable’.

In Bredenkamp and Others v Standard Bank of SA Ltd [2010] 4 All SA 113 (SCA), Harms DP stated that the notions of ‘fairness, justice and reasonableness’ should not extend beyond instances of public policy as well as ‘[m]aking rules of law discretionary or subject to value judgments may be destructive of the rule of law’. This article is an illustration that Harms’ view is correct.

The Botha case seems to indicate that enforcement of contractual obligations now relies on a particular judge’s view of what is fair rather than the terms of contract especially when we compare it to the Barkhuizen case. Thus there are two completely different notions on what is ‘fair’.

It is a general rule that courts are assumed to know the law and take judicial notice of statutes. The Botha case clearly illustrates that this is not always the position. I urge legal practitioners in future to take notice of Raad vir Kuratore vir Warmbad Plase v Bester 1954 (3) SA 71 (T). The existence of statute need not be pleaded but it is helpful. I am referring to this case in that the existence of the Act was never considered.

In Sasfin (Pty) Ltd v Beukes [1989] 1 All SA 347 (A) Smalberger JA warned that ‘[o]ne [referring to a judge] must be careful not to conclude that a contract is contrary to public policy merely because its terms (or some of them) offend one’s individual sense of propriety and fairness’. The Botha case does exactly the opposite and the CC applied its own individual sense of propriety and fairness without taking legislation into account.

Section 8(3)(a) in the Bill of Rights requires the court to develop the common law to the extent that legislation does not give effect to that right. This begs the question: How is it possible for the CC to develop the common law while ignoring and acting contrary to the Act, whose sole purpose it is to address ‘unfairness’ of forfeiture clauses?

In the Botha case the CC placed the burden of proof on the seller in that the seller must show that the cancellation is fair taking account of the buyer’s consequence of doing so, namely, the forfeiture. Meanwhile, the law is clear that the full legal onus of proving that the penalty is out of proportion to the prejudice suffered by the seller in terms of the Act is on the buyer (see Steinberg v Lazard 2006 (5) SA 42 (SCA)).

Conclusion

What the CC has done is to provide decisions based on a particular judge’s view on what is fair, without considering the terms of a contract, relevant legislation or the law of contract itself. The court did not even compare the possible outcomes of these type of cases when determined via the ‘rule of law’ as compared to its personal notions of what is fair. The decision in the Botha case is simply incorrect as the court was obliged to follow the Act and at the very least comply with its provisions, unless there was a direct constitutional challenge to its provisions, and the Act was found to be unconstitutional. Instead the final outcome of the case leads to intolerable legal uncertainty, which has further opened the doors to defaulting parties to resist contractual rights of the other party, on the notion of fairness. The result and outcome in this case, is therefore, destructive to the rule of law.

The CC needs to ask itself the question: Quo vadis?

Igor Szopinski LLB Cert Adv Inter Trade Law (Wits) is a legal practitioner in Johannesburg. Mr Szopinski writes in his personal capacity.

This article was first published in De Rebus in 2019 (May) DR 13.