The law of contract post the 1996 Constitution

The judgment in Beadica 231 CC and others v Trustees, Oregon Unit Trust and Others 2018 (1) SA 549 (WCC) goes to the heart of the debate as to what, post the Republic of South Africa Constitution Act of 1996, constitutes the law of contract in South Africa.

18 Jul 2018 6 min read Dispute Resolution Alert Article

The applicants were franchisees in terms of franchise agreements entered into with the second respondent for an initial period of ten years. Their businesses primarily consisted of the rental and sale of builders’ equipment and tools. They were all black-owned enterprises, having acquired their businesses as part of a black economic empowerment transaction.

Pursuant to the franchise arrangements, each of the applicants concluded an agreement with the first respondent for a lease of its premises. The leases would be for an initial period of five years, with a right to renew them for a further five years, provided that the lessees exercised their renewal options at least six months prior to the initial termination date.

The lease agreements ran parallel to the franchise agreements.

The applicants did not timeously renew their leases. They did, however, albeit out of time, address correspondence to the first respondent which, so they claimed, constituted an exercise of their options to renew the lease agreements for a further five years. They contended that they were salespeople, that they were not acquainted with the intricacies and implications of the law of contract and/or of lease and that they genuinely wished to renew the leases, as is evidenced by such correspondence.

The applicants faced the real prospect that their businesses would close and/or that their franchise agreements would be terminated if the lease agreements were not renewed.

They sought an order declaring that the said correspondence served as a valid exercise of their options to renew the lease agreements for a further period of five years.

Davis J granted the order.

He reasoned as follows.

In a series of cases culminating in Botha v Rich NO and Others 2014 (4) SA 124 (CC), the Constitutional Court nodded in the direction of a more communitarian construction of the foundational values of freedom, dignity and equality to infuse a greater degree of fairness into the law of contract. For this reason, the court spoke about the fact that honouring a contract cannot “be a matter of each side pursuing his or her own self-interest . . . without regard to the other party’s interest”.

The struggle to balance these competing visions can be located in the tension between individual autonomy and what, in the South African context, is generally sourced in the value of ubuntu. In this context ubuntu means that a person becomes a person through other persons, by way of a communal relationship with others.

Applicants’ counsel argued that the law of contract in South Africa was now infused with constitutional values which, for the determination of this case, were not only predicated on the strict terms of the lease agreements but which also had to be examined within the broader context of the purpose behind both sets of agreements and having regard to the doctrine of good faith and fairness.

Applicants’ counsel referred to the decision in Everfresh Market Virginia (Pty) Ltd v Shoprite Checkers (Pty) Ltd 2012 (1) SA 256 (CC) where Moseneke DCJ said the following:

Had the case been properly pleaded, a number of interlinking constitutional values would inform a development of the common law. Indeed, it is highly desirable and in fact necessary to infuse the law of contract with constitutional values, including values of ubuntu, which inspire much of our constitutional compact. On a number of occasions in the past this court has had regard to the meaning and content of the concept of ubuntu. It emphasises the communal nature of society and ‘carries in it the ideas of humaneness, social justice and fairness’ and envelopes the key values of group solidarity, compassion, respect, human dignity, conformity to basic norms and collective unity.

In Botha v Rich NO and Others 2014 (4) SA 124 (CC) Nkabinde J developed this approach further:

The principle of reciprocity falls squarely within this understanding of good faith and freedom of contract, based on one’s own dignity and freedom as well as respect for the dignity and freedom of others. Bilateral contracts are almost invariably cooperative ventures where two parties have reached a deal involving performances by each in order to benefit both. Honouring that contract cannot therefore be a matter of each side pursuing his or her own self-interest without regard to the other party’s interests. Good faith is the lens through which we come to understand contracts in that way.

Davis J referred to Mohamed’s Leisure Holdings (Pty) Ltd v Southern Sun Hotel Interests (Pty) Ltd 2017 (4) SA 243 (GJ) as a recent application of the dicta in Everfresh. In such case, the applicant landlord and respondent tenant’s lease provided that if the tenant failed to pay a month’s rent by its due date, the landlord could cancel the agreement and repossess the property. When the tenant’s bank, owing to a technical error, failed to make a month’s payment, the landlord cancelled the lease, and applied for the tenant’s eviction. The issue was whether the cancellation clause should be enforced. The court held that, given the prejudice that would result to the tenant and where the blame for the default lay, to enforce the clause would offend the constitutional values of ubuntu and fairness. The court dismissed the application.

Back to the case before him, Davis J found that, if the lease agreements were cancelled, the franchise agreements would not have effect and the applicants’ businesses would collapse. The vitally important initiative designed to encourage ownership of business by historically disadvantaged people would be dealt a blow, and a vital one for these applicants. If their application failed, they would lose their businesses.

Davis J said that the case really turned on the question as to whether the applicants complied strictly with the provisions of the lease or whether in substance they did comply.

According to the judge, there could be little doubt that, when the contracts were concluded, the parties envisaged that the franchise agreements would endure for ten years, that the applicants’ businesses would be in the leased premises and that after five years they would have a right to renew their leases. The two sets of agreements were inextricably tied, one to the other.

Davis J said that, if honouring a contract was not merely a matter of each side pursuing his or her own self-interest above the other party’s interest, and if that is not the exclusive lens through which our contract law should be evaluated, then, in order to promote a more nuanced focus, it must follow that the relief sought by applicants should be granted.

Davis J addressed the contention that such a conclusion would undermine legal certainty, in particular, the problem of enforcement of contractual obligations being dependent upon a judicial sense of reasonableness, fairness and good faith rather than in terms of a contract.

The judge said that the Constitution demands an audit of all law and that such demand cannot be defended by the idea that legal certainty will be compromised. The journey to legal change may cause understandable anxiety but, if honestly managed, it will introduce a rule of law for the protection of 55 million South Africans without the detrimental consequences suggested.

The judge was of the view that, in the vast majority of cases, the approach adopted by him in this dispute on its specific facts will not necessarily be followed, “where the consequence of a breach is so reasonably foreseen and the remedy is appropriate”.

But in this instance the respondents did not do enough to justify their opposition to the applicants’ case. The very idea of the transaction was, firstly, to promote the interests of historically disadvantaged applicants to participate fully in the economy and, secondly, to embrace them, not only as political, but as economic citizens. The respondents contended that the applicants (who did not have the requisite business knowledge) should have requested a renewal of their leases in a more precise form and within the specified dates. In the circumstances of this case, these contentions were insufficient to justify their opposition to the relief sought by the applicants.

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