2 December 2015 by Cliffe Dekker Hofmeyr Dispute Resolution Matter

Do our courts interfere in unfair contracts?

Judge Davis in the Western Cape High Court, in the case of Combined Developers v Arun Holdings & Others 2015 (3) SA 215 WCC recently refused to enforce a clause in a contract where enforcement was unfair.

Legal academics have been calling for recognition of an ethical standard of good faith in the law of contract. Since 1996 our courts are enjoined by our Constitution, when developing the common law, to promote the spirit, purport and object of the Bill of Rights which represents a value system ordained by the Constitution as the supreme law of our country. Freedom of contract was not included as a fundamental right in the Bill of Rights.

The Supreme Court of Appeal (SCA), resistant to radical change, but aware of its duty to keep the law aligned with changing social needs and values, has adopted a conservative course of incremental change within a framework of existing legal principles, using public policy and refinement thereof, as an instrument for change. In an article in the 2009 SA Law Journal by Mr Justice F Brand SC, a judge in the SCA, he concedes that "maybe the fine tuning of ‘public policy’ may also require greater activism and ingenuity on the part of the judiciary than they have hitherto displayed". However, he warns that palm-tree justice is no substitute for the application of established principles of contract law.

Having regard to what is described as a Mexican stand-off between our twin apex courts, our high courts are not hesitant in dealing with contracts where intervention is called for by one of the parties. In the case of Potgieter & Another v Potgieter N.O. & Others 2012 (1) SA 637 SCA we see our SCA overturning a judgment of

the Gauteng High Court where Judge Bertelsmann found that "under our new constitutional dispensation it is part of our contract law that, as a matter of public policy, our courts can refuse to give effect to the implementation of contractual provisions which it regards as unreasonable and unfair". In reversing this judgment as being fundamentally unsound, the SCA was adamant in stating that "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". The SCA justifies its criticism of Bertelsmann’s judgment by referring to the Constitution. The failure by Judge Bertelsmann to follow the tenets of the common law offended the principle of legality, regarded by the SCA as part of the rule of law, which in turn constitutes a founding value in s1 of the Constitution. That was the last word on this topic from the SCA.

While the SCA is vehemently protecting contractual autonomy, we find statements in Constitutional Court judgments that "contract Law cannot confine itself to colonial tradition alone … values embraced by an appropriate appreciation of Ubuntu are also relevant in the process of determining the spirit, purport and objects of the Constitution", and "indeed it is highly desirable, in fact necessary, to infuse the law of contract with constitutional values including values of Ubuntu which aspire much of our constitutional compact".

Recently, in the Western Cape High Court, Judge Davis, clearly taking up the challenge from Mr Justice Brand in his article, refused to enforce a contractual provision which he described as "startlingly draconian and unfair". In arriving at his judgment, he draws from the Constitutional Court judgment in Everfresh Market Virginia (Pty) Limited v Shoprite Checkers (Pty) Limited 2012 (3) BCLR 219 CC where reference is made to "an infusion of the law of contract with constitutional values including values" of Ubuntu. Judge Davis acknowledges the fact that his individual sense of propriety and fairness is not the test and then, recognising the SCA’s acceptance of public policy as the legal mechanism for intervention, , looks to the normative framework of the constitution in order to identify an objective standard. Drawing from the SCA’s judgment in Juglal v Shoprite Checkers (Pty) Limited 2004 (5) SA248 SCA, Judge Davis drills into the core of the SCA’s judgment where it refers to "unconscionable immoral or illegal conduct" and concludes that implementation of the contractual provision, which may not itself be contrary to public policy, is so objectionable that it is sufficiently "oppressive, unconscionable or immoral" to constitute a breach of public policy and that public policy can be invoked in justification of a refusal to enforce such a provision.

It is clear that our High Court judges will not hesitate to intervene in contracts which they perceive to be sufficiently "oppressive, unconscionable or immoral" to be contrary to public policy and that they are prepared to apply greater activism and ingenuity, as suggested by Mr Justice Brand. We will have to wait and see to what extent the SCA will allow public policy to be "fine tuned" (or perhaps stretched?) in this process.

The Constitutional Court, however, may be champing at the bit to rewrite our law on good faith in contracts.

 

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